Frequently Asked Questions

A tripartite escrow agreement involves several entities contractor, California Bank and Trust as escrow agent, sub-contractors, and suppliers of material and/or labor. The Government makes payments to the contractor's escrow account, and the escrow agent distributes the payments in accordance with the agreement, or triggers the disputes resolution procedures if required.

2. WHAT ARE THE ADVANTAGES USING A TRIPARTITE ESCROW AGREEMENT?

NO personal or company financial statements.
NO collateral required.
NO disclosure of license information.
NO work history needed.
NO initial formal or informal meetings between contractor and escrow agent (California Bank and Trust).
NO attorney, banker or accountant referrals.
NO establishing or justifying contractor’s projects’ work in progress.
NO information about contractor’s credit history or any of its financial accounts.
NO disclosure of contractor’s personal or company assets.
NO indemnification by contractor.
NO limitations on number of contracts.
YOU can bid as many solicitations as you desire.
YOU pay a fee of only 1½% of the contract.

3. WHY DOES THE GOVERNMENT ALLOW A TRIPARTITE ESCROW AGREEMENT?

Pursuant to the Federal Acquisition Regulation Part 28 Section 28.102, (FAR 28.102), and Defense Federal Acquisition Regulation Part 52 Section 228-13, (DFAR 52.228-13) the federal government authorizes tripartite escrow agreements in lieu of Payment Bonds.

4. WHEN CAN I USE AN ESCROW AGREEMENT?

Check your specific solicitation of your contract. You will find most government departments/agencies allow tripartite escrow agreements in lieu of payment bonds for projects up to $150,000. If you have a tripartite escrow agreement as an option in your solicitation you can save much money and time, and avoid the anxiety and possible disappointment caused by dealing with bonding companies. Tripartite Escrow Corporation's fee is only 1½% of the total contract amount.

5. WHAT IS NEEDED FOR A TRIPARTITE ESCROW AGREEMENT?

All that is required to establish a tripartite escrow agreement for your contract is the company name, address, telephone number, fax number, and point of contact of all the suppliers of material and/or labor; name of government department/agency; and your company name, address, telephone number, and fax number.

6. HOW ARE WE DIFFERENT?

We are unlike the vast majority of bonding companies. Bonding companies may charge anywhere from 2% to 5% of the contract price for a Payment Bond. In contrast, we charge for a Tripartite Escrow Agreement only 1½% -- up to four times less, depending on the bonding company. Moreover, suppliers who may not want to take the risk with certain contractors are ensured they will all get paid.

7. WHAT IS INVOLVED WITH A TRIPARTITE ESCROW AGREEMENT?

First, the contractor establishes an escrow account in a federally insured financial institution and enters into a tripartite escrow agreement with the financial institution (California Bank and Trust ), as escrow agent, and all of the suppliers of labor and/or material. The Tripartite Escrow Agreement establishes the terms of payment under the contract and process for resolution of disputes among the parties. The government makes payments to the contractor's escrow account, and the escrow agent (California Bank and Trust ) distributes the payments in accordance with the agreement, or triggers the disputes resolution procedures, if required. It is that easy!

8. HOW DOES TRIPARTITE ESCROW AGREEMENT WORK?

The government makes payments to the contractor's escrow account, and the escrow agent (California Bank and Trust ) distributes the payments in accordance with the agreement, or triggers the disputes resolution procedures if required. Click here, How it works

9. DOES TRIPARTITE ESCROW SERVICE HAVE A LIMIT ON TRANSACTION SIZE?

Yes, each contract needs to be less than $150,000.

10. HOW MUCH DO THE SERVICES OF TRIPARTITE ESCROW CORPORATION COST?

To establish an account with TEC is free. After an escrow account is established the escrow management fee is 1½% of the total contact amount and is due 60 days after the government approves the Tripartite Escrow Agreement.

11. WHO IS RESPONSIBLE FOR PAYING THE ESCROW FEES?

The contractor is responsible for all escrow fees.

12. HOW QUICKLY ARE ALL PAYMENTS PROCESSED?

Wire transfers make payment processing fast and simple, but it depends upon your financial institution. Some institutions require a few hours. However, California Bank and Trust wire transfer account can receive funds at any time of the day or night and processes all transfers immediately.

13. HOW DO I CHECK THE STATUS OF MY ACCOUNT?

Either call your Escrow Manager at 1.800.579.5813, Ext. 101 or e-mail at abelc@tripartiteescrow.com.

14. WHAT IS AN ESCROW ACCOUNT?

The prime contractor establishes an escrow account in a federally insured financial institution and enters into a Tripartite Escrow Agreement with the financial institution, an escrow agent, and all of the suppliers of labor and material. The Tripartite Escrow Agreement establishes the terms of payment under the contract and resolution of disputes among the parties. The Government makes payments to the contractor's escrow account, and the escrow agent distributes the payments in accordance with the agreement, or triggers the disputes resolution procedures if required.

15. HOW CAN I DETERMINE IF A BID BOND IS REQUIRED?

BID BOND
Please reference Federal Acquisition Regulation Part 28 Section 28.101 -- Bid Guarantees. This section states in subsection (a) of FAR Part 28 Section 101-1, "A contracting officer shall not require a bid guarantee unless a performance bond or a performance and payment bond is also required."

In section 28.102 -- Performance and Payment Bonds and Alternative Payment Protections for Construction Contracts.

28.102-1 -- General.

(a) The Miller Act (40 U.S.C. 270a-270f) requires performance and payment bonds for any construction contract exceeding $150,000, except that this requirement may be waived

(1) By the contracting officer for as much of the work as is to be performed in a foreign country upon finding that it is impracticable for the contractor to furnish such bond; or

(2) As otherwise authorized by the Miller Act or other law.

(1) Pursuant to 40 U.S.C. 3132, for construction contracts greater than $30,000, but not greater than $150,000, the contracting officer shall select two or more of the following payment protections, giving particular consideration to inclusion of an irrevocable letter of credit as one of the selected alternatives:

1. A payment bond.

2. An irrevocable letter of credit (ILC).

3. A tripartite escrow agreement. The prime contractor establishes an escrow account in a federally insured financial institution and enters into a tripartite escrow agreement with the financial institution, as escrow agent, and all of the suppliers of labor and material. The escrow agreement shall establish the terms of payment under the contract and of resolution of disputes among the parties. The Government makes payments to the contractor's escrow account, and the escrow agent distributes the payments in accordance with the agreement, or triggers the disputes resolution procedures if required.

4. Certificates of deposit. The contractor deposits certificates of deposit from a federally insured financial institution with the contracting officer, in an acceptable form, executable by the contracting officer.

5. A deposit of the types of security listed in 28.204-1 and 28.204-2.

(2) The contractor shall submit to the Government one of the payment protections selected by the contracting officer.

(c) The contractor shall furnish all bonds or alternative payment protection, including any necessary reinsurance agreements, before receiving a notice to proceed with the work or being allowed to start work.

16. WHAT IF THE CONTRACTING OFFICER IS UNFAMILIAR WITH AND/OR REJECTS THE TRIPARTITE ESCROW AGREEMENT?

A. COMMUNICATIONS BETWEEN CONTRACTING OFFICER AND TRIPARTITE ESCROW CORPORATION.

Some contracting officers are unfamiliar with the Tripartite Escrow Agreement as it relates to the Federal Acquisition Regulation. At Tripartite Escrow Corporation we are aware of this circumstance and communicate with the contracting officer regarding the tripartite escrow agreement. Moreover, if the contracting officer has any questions about the escrow agreement Tripartite Escrow Corporation answers all questions.

B. COMMUNICATIONS BETWEEN CONTRACTING OFFICER AND CONTRACTOR BEFORE AWARD OF CONTRACT.

First, contractors must ensure a tripartite escrow agreement is expressly authorized within their respective federal solicitation. Tripartite Escrow Corporation recommends contractors communicate with the contracting officer their intentions of utilizing a Tripartite Escrow Agreement versus a payment bond or any other payment protection before submitting their bids. Also recommended in your oral and written communications to the contracting officer is the identification of the applicable and specific Federal Acquisition Regulation within your respective solicitation.

17. IS THERE AN ESCROW AGREEMENT AND/OR SIMILAR INSTRUMENT FOR CONTRACTS OVER $150,000?

Tripartite Escrow Corporation is presently unaware of any such escrow agreement or instrument. The maximum threshold for a Tripartite Escrow Agreement is $150,000. The purpose of this alternative payment protection is to assist small businesses performing contracts $150,000 and less for the federal government.

18. WHERE EXACTLY DO I FIND THE WORDING FOR TRIPARTITE ESCROW AGREEMENT WITHIN MY SPECIFIC SOLICITATION?

Within your solicitation under the section heading 52.228-13 or 28.102 Alternative Payment Protections you will find subsection (iii) Tripartite Escrow Agreement listed as one of the alternative payment protections.

19. WILL TRIPARTITE ESCROW CORPORATION COMMUNICATE WITH THE CONTRACTING OFFICER REGARDING THE TRIPARTITE ESCROW AGREEMENT?

Tripartite Escrow Corporation will assist in establishing the Tripartite Escrow Agreement with the contracting officer. This service by Tripartite Escrow Corporation is completely free for those who have established an account with Tripartite Escrow Corporation.

IRS §1031 EXCHANGE

1. WHAT IS A 1031 EXCHANGE?
Effectively, Internal Revenue Code Section 1031 exchanges allow investors to sell property and reinvest the proceeds in another property without having to pay taxes that would otherwise be owed on recognized gain from sale. The payment of such capital gains tax is deferred, representing only a potential tax which is not owed unless and until the replacement property is sold in a subsequent taxable transaction. The taxes may, in some cases, be avoided all together, for example if the replacement property passes through an estate and its basis is stepped up to the market value at the time of death.

Section 1031 of the IRC provides that no gain or loss is recognized if property "held for productive use in a trade or business or for investment" is traded solely for other "like-kind" property which also is to be held for investment or used in a trade or business. The essence of such a trade is a reciprocal and interdependent transfer of one property for another, as opposed to a simple sale and repurchase.

2. WHAT ARE THE MECHANICS OF A 1031 EXCHANGE?
While transactions may vary, the basic Xchange Solutions exchange usually proceeds like this:

1. The seller ("exchanger") of the property to be exchanged, ("relinquished property"), finds a buyer to purchase his/her property. The Exchanger includes specific "intent and cooperation" language in the purchase contract: the exchanger expresses intent to exchange and the buyer expresses cooperation in signing any necessary and appropriate documents to accomplish the exchange.

2. The exchanger and Xchange Solutions ("intermediary") enter into an Exchange Agreement and an Assignment and Substitution Agreement which provide that:
(a) The intermediary is substituted into the purchase contract (and escrow instructions, if applicable) as the seller.
(b) The exchanger conveys the relinquished property to the intermediary, and the intermediary immediately conveys the relinquished property to the buyer by direct deed from the exchanger.
(c) The proceeds from the exchange of the relinquished property are held in a Qualified Escrow Account.
(d) The exchanger identifies in writing the property they wish to acquire ("replacement property") in exchange for the relinquished property.
(e) The intermediary is substituted into the purchase contract (and escrow instructions, if applicable) as the buyer.
(f) The intermediary, using the funds held on account, acquires the replacement property, and immediately conveys the replacement property to the exchanger by direct deed from the seller of the replacement property to the exchanger.

THIS ENTIRE TRANSACTION HAS BEEN PROTECTED AS FOLLOWS:

1. A guaranty of escrow funds by a national title company.

2. Letters of credit are issued by the institution holding exchange funds.

3. Funds are held in a restricted, protected, joint-signature account at a bank.

3. WHAT IS THE DIFFERENCE BETWEEN A SIMULTANEOUS AND A DELAYED EXCHANGE?
Simultaneous exchange: you convey the title to the relinquished property concurrent with and just before receiving the replacement property.

Delayed exchange (also called a "Starker" or "deferred" exchange), you convey title to the relinquished property up to 180 days before acquiring title to the replacement property.

Previously the IRS held that qualifying exchanges must be simultaneous. Delayed exchanges were sanctioned by court action in the landmark case Starker v. United States in 1979. In response to Starker, Congress formally approved delayed exchanges by way of the Tax Reform Act of 1984, which added the statutory 45 day identification and 180 day closing time-frames. With the new Final Regulations for Delayed Exchanges issued in June of 1991, exchanges adhering to the safe harbors defined therein are perhaps better able to withstand audit than are simultaneous transactions.

4. WHAT IS A REVERSE EXCHANGE?
Reverse Exchanges ("Reverse Starker") the exchanger acquires the replacement property before conveying the relinquished property. These are used when individuals wish to exchange property they own for property which must be purchased prior to the sale of the relinquished property.

5. WHAT IS A "BUILD-TO-SUIT" OR "CONSTRUCTION" EXCHANGE?
"Construction" or improvement exchanges are for replacement property to be built. The replacement property is built-to-suit, or is further improved or altered, etc., to the specifications of the exchanger. In a construction exchange, Xchange Solutions usually acquires the replacement property, causes the improvements to be built during its ownership, and conveys the improved property to the exchanger. The building is done in accordance with the building specifications outlined in the purchase contract, and/or escrow instructions, prior to the substitution of Xchange Solutions as the buyer. The exchanger approves all work done before disbursement of funds by Xchange Solutions and exchangers may use the contractor of their choice as long as they are not a "disqualified" person under the Regulations.

While real property improvements need not be completed within the Exchange Period, the value of any portion of the improvements not completed within this time frame will not qualify as replacement property. The 180-day Exchange Period may effectively be extended by delaying the transfer of the relinquished property. This may allow some time for work to begin on construction of improvement on the replacement property. Property "to be produced" in a construction exchange, which is not completed within the 180-day Exchange Period, must be part of the standing structure to be considered real property under local law. A load of raw building material delivered to the building site, will not qualify as improved real property.

6. WHAT IS A PARTIALLY TAX-DEFERRED EXCHANGE?
Partially tax-deferred exchanges are transactions in which some portion of the realized gain is recognized and some is not (i.e., you will pay some of the taxes due upon sale, but not all). Examples include: 1. Exchanges which are a combination of a 1031 exchange and an installment sale, with the loan documents payable to the exchanger; 2. Exchanges involving replacement property which is comprised of business or investment property and personal property. You can be fully tax-deferred on these exchanges if you do a multi-asset exchange, covering both the real and personal property; 3. Exchanges where a portion of the gain is taken in cash or other "boot" property, and the balance of the gain is invested in qualifying replacement property.

7. WHY ARE MOST 1031 EXCHANGES STRUCTURED AS DELAYED EXCHANGES?
There are several important benefits of delayed exchanges:

1. Delayed exchanges allow the exchanger additional time to find and close the purchase of replacement property. The replacement need not be identified or acquired when the relinquished property is sold. The exchanger can consider market opportunities rather than feel pressured to immediately identify and purchase all replacement property. A word of caution: the 45-day Identification period is probably the most difficult rule to come out the Final Regulations. We strongly suggest that exchange clients have several properties ready to identify as potential replacement properties before they close on their relinquished property. Otherwise, the exchangers may learn to their dismay, just how rapidly forty-five days can disappear.

2. As a practical matter, it is often extremely difficult to coordinate concurrent closing, especially if the relinquished and replacement property transactions are effected in different counties and states. For example, funds from the sale of the relinquished property are almost always used to pay for the replacement property. Funds should flow through the Intermediary, and even if the closings are in the same state or at the same escrow company, it's almost impossible to effectively make the proceeds of the relinquished property payable to the Intermediary, and then have them instantly available for funding the closing of the replacement property on the same day.

3. In simultaneous transactions, recording at different locations, it is extremely difficult to insure that the exchangers' transfer of the relinquished property occurs before, or simultaneous with, the exchangers' receipt of the replacement property, as current law appears to require.

4. In almost every simultaneous exchange, only one potential taxpayer is able to take advantage of trading "even or up" in equity and debt. The other party to the exchange is usually, by necessity, exchanging down in both equity and debt, leaving "boot" to be taxed at the current capital gains rate. If each party completed a delayed exchange, both could exchange "even or up" in equity and debt and effect a completely tax-deferred scenario for both parties.

8. EXCHANGES SEEM SO COMPLICATED - CAN YOU SIMPLIFY THE RULES FOR ME?
Yes. Fully tax-deferred exchanges are effected when you properly identify and receive like-kind qualifying property of equal or greater value, subject to equal or greater debt, without any actual or constructive receipt of cash or other non like-kind property.

9. WHAT ARE THE ADVANTAGES OF A 1031 EXCHANGE?
The primary advantage of a 1031 exchange is the preservation of investment capital by deferring payment of capital gains taxes. If you sell property (rather than exchanging it) you must pay taxes on any recognized gain. Capital gains tax is usually 20% to 25% of your gain, plus any state taxes. In a tax-deferred exchange, all your profit (both cash and carry-backs) may be used to acquire replacement property. Astute investors understand that 1031 exchanges allow greater net profits, the purchase of larger or additional investment property and a faster pyramiding of wealth.

Exchanges are a great tax planning mechanism allowing the deferment of taxes until the taxpayer is in a lower tax bracket or until a more beneficial tax rate exists.

Reasons for exchanging include: consolidation of several smaller properties into one larger investment to facilitate easier management or better cash flow, shifting investment from one area or locale to another to take advantage of local market opportunities, avoiding "deferred maintenance" by trading out the older properties into newer ones and diversification of investment portfolios by trading out of a single property, or type of property, into various investments or multiple properties.

10. WHEN DO I HAVE TO PAY THE DEFERRED CAPITAL GAINS TAX?
Only if and when you elect to sell, as opposed to exchange, your replacement property.

11. WHY NOT LEAVE THE MONEY IN AN ESCROW ACCOUNT?
The Closing Agent acts upon instructions from all parties to the transaction. To leave the funds in the escrow or trust account requires the Exchanger to give such instructions to the Closing Agent. This control is called "constructive receipt" and invalidates the exchange.

12. WHERE ARE THE ESCROW FUNDS HELD?
Exchanger's funds are deposited into individual insured accounts. Xchange Solutions has relationships with several nationally recognized banks and financial institutions. Because security of the funds is a key concern to the Exchanger, Xchange Solutions is able to provide a variety of security devices not available through other Intermediaries.

13. HOW MUCH IS THE ESCROW FEE FOR AN EXCHANGE?
For a complete 1031 exchange the escrow fee rate with TEC is 1½% of the maintained funds in the escrow account.

14. DO I NEED AN ATTORNEY OR A TAX ADVISOR?
Competent legal and/or accounting counsel is always recommended and should always be engaged. Tax laws are continually changing and I.R.C. Section 1031 exchanges are often extremely complex or highly technical, requiring guidance and answers to interpretive questions best left to competent legal or tax advisors. Xchange Solutions will assist you in procuring such help at your request.

15. WHAT RESTRICTIONS APPLY TO EXCHANGES INVOLVING RELATED PARTIES?
The Revenue Reconciliation Act of the 1989 Legislative session effected a two year related party restriction wherein property conveyed to a related party is now subject to a two year holding period. If either the exchanger or the related party disposes of the acquired properties within the two year period, the non-recognition provisions will not apply and the exchanger must recognize gain as of the date the disqualifying disposition occurs. A related party is defined by cross reference to I.R.C. Section 267(b) which covers a wide range of relationships including family members, corporations, partnerships and trusts.

16. CAN I EXCHANGE OUT OF MORE THAN ONE RELINQUISHED PROPERTY OR INTO MORE THAN ONE REPLACEMENT PROPERTY?
Yes. You can exchange one relinquished property into one or more replacement properties, and vice versa.

17. MUST THE REPLACEMENT PROPERTY I RECEIVE IN THE EXCHANGE HAVE ANY MINIMUM VALUE?
Yes, for a full tax-deferred exchange. To defer all taxes otherwise due upon sale, the aggregate fair market value of all replacement property received must be equal to or greater than the aggregate fair market value of all relinquished property. If you trade down in either equity or debt, the difference may be taxable to the extent of your gain.

18. CAN I FINANCE THE BUYER'S PURCHASE OF MY RELINQUISHED PROPERTY?
Yes, and you have several options should you choose to combine a 1031 exchange and an installment sale, with the loan documents payable to the Intermediary:

a. Option #1 - Exchanger can try to locate a seller of a replacement property who is willing to take the Note as part of the consideration. If the seller is motivated and the Note is well-secured, this could be a viable approach. The Intermediary, as the Beneficiary of the Note and Trust Deed, would give the cash and Note to the seller in return for the replacement property.
b. Option #2 - The Intermediary could sell the Note to another party (usually at a discount) and apply the cash proceeds towards the acquisition of the like-kind replacement property. The cash proceeds would be added to the funds the Intermediary was holding from the sale of the relinquished property. Any discount from the sale of the Note would have to be offset with additional cash from the Exchanger before the acquisition property is closed.
c. Option #3 - In a separate transaction, the Exchanger may purchase the Note from the Intermediary. The Intermediary would, in turn, apply the combined funds from the Note sale and the sale of the relinquished property to acquire a replacement property. Care must be taken so that the Note sale is indeed a separate transaction. There is a possibility that the IRS could view the Exchanger's receipt of the Note from the Intermediary as boot, or even worse, as constructive receipt, thereby endangering the exchange.
d. Option #4 - If Option #3 cannot be properly documented, the Exchanger may wish to lend $200,000 to the Buyer of the relinquished property outside of the closing in return for a Note and Deed of Trust to be secured by the property. The Buyer would then purchase the property from the Intermediary for $200,000 cash. The Intermediary now has $200,000 cash to use to acquire the replacement property.

19. DO I NEED ANY SPECIAL DOCUMENTS TO EFFECT AN I.R.C. §1031 EXCHANGE?
Yes. An exchange is not a sale. A special exchange agreement is needed. The buyer of the relinquished property must agree to cooperate in completing the I.R.C. Section 1031 exchange, as that buyer will actually be purchasing the relinquished property from the Intermediary. Conversely, the seller of the replacement property will be asked to cooperate as the Intermediary is substituted in as the buyer of the replacement property. Such cooperation is usually secured through "intent and cooperation" language placed in the real estate contract for both the relinquished property and the replacement property. In addition, a comprehensive exchange agreement, assignment and substitution forms and a qualified escrow agreement should be prepared in accordance with the provisions of I.R.C. Section 1031. Each exchange is unique, and other documents specific to each individual exchange may need to be prepared and executed.

20. WHAT ARE THE GENERAL STATUTORY REQUIREMENTS FOR AN I.R.C. §1031 TAX-DEFERRED EXCHANGE SINCE THE FINAL REGULATIONS PUBLISHED IN JUNE OF 1991?
1. Both the property surrendered and the property received must be held for productive use in a trade or business, or for investment;

2. The property surrendered and the property received must be of "like-kind";

3. The exchange must be a reciprocal transfer of properties as distinguished from a sale and repurchase; There were other "rules" to come from the Final Regulations, such as Identification Period (45 days), Exchange Period (180 Days), form of Identification, Identification Rules, and the rule regarding the fact that you must acquire substantially what you have identified. There are other rules regarding restrictions on the funds on deposit from the exchange of the relinquished property. We will address these other rules as we proceed.

21. WHAT IS BOOT?
Not all property transferred in an exchange must be of like-kind. Other property or money can be transferred in addition, without invalidating the exchange. Such non like-kind property is called "boot". In general, boot is only taxable to the extent of the realized gain. Transactions involving boot must be very carefully structured so as not to invalidate the qualifying portion of the trade. The receipt of money or non like-kind property will cause the realized gain, if any, to be recognized to the extent of the sum of money and the fair market value of the property received. In other words, you have to pay taxes on any money or other non like-kind property you receive in an exchange. Properly configured exchanges are structured so as to eliminate or minimize boot.

22. WHAT IS CONSTRUCTIVE RECEIPT?
Constructive Receipt occurs in an exchange when a taxpayer has the unrestricted right to access cash or boot, whether or not such right is exercised, and regardless of whether there is actual or physical receipt of the cash or boot. Any cash or boot received by the exchanger will cause recognition of gain (i.e., taxable income).

23. WHAT IS "DEBT RELIEF?"
"Debt Relief" or "Mortgage Relief" is any net reduction in the amount of liability on the replacement property after the exchange, as compared to the amount of liability on the relinquished property just prior to the exchange. It will be considered boot and will result in the recognition of gain unless offset by the payment of additional cash by the exchanger.

24. WHAT IS "DIRECT DEEDING?"
Direct-deeding streamlines transactions allowing for easier and quicker closing. More importantly, direct-deeding typically saves considerable additional expense, such as escrow fees, document preparation charges and transfer taxes otherwise incurred in "sequentially-deeded" transactions. Direct-deeding eliminates, to a great degree, the problems currently associated with environmental clean-up, as it eliminates the need for anyone other than the proper purchaser to appear in the chain of title. It also eliminates the chance that liens, clouds or judgments will attach to the relinquished or acquisition properties to the extent that they are attached to any individual chosen to facilitate the exchange. As the final regulations fully sanction direct-deeding, it should be employed at every opportunity.

25. WHAT IS "LIKE-KIND?"
The words "like-kind" refer to the nature or character of the property, not its grade or quality. For example, real property is not of like-kind to personal property because they are of a different nature and character. Conversely, vacant land, for example, is of like-kind to improved property as the two differ only in their grade/quality. Raw land, condominiums, single family residences, shopping centers, apartment buildings, farm and ranch land, commercial real estate, industrial property, second homes converted to investment property, and almost all other realty are of like-kind with respect to their intrinsic nature and character and may, therefore, be interchangeably exchange. With limited exceptions, any real estate meeting the above tests can be exchanged for any other real estate. In addition, the rules excepting incidental property from the identification requirements should not be construed as meaning such property will be considered like-kind realty. Remember, the final regulations for "Multi-Asset/Personal Property" exchanges provide for very narrow like-kind qualification of any non-realty business or investment property, which may be transferred together with real estate in your transactions. For example, any furniture, manufacturing or other equipment, autos, or art work, etc. transferred in addition to real estate is not like-kind to realty received as replacement property. The definition of realty is determined by each state in the United States, and any person wishing to exchange should determine the definition of realty according to the state or states where the relinquished and replacement properties are located.

26. WHAT EXACTLY IS A SAFE HARBOR?
A Safe Harbor is a "suggestion" from the IRS. They are not substantive rules, but to the degree that auditing agents understand them, they will be applied as "Holy Writ". At this point in our outline, I would like to quote B. Wyckliffe Pattishall, Jr., President of Chicago Deferred Exchange Corporation, and one of the experts in America on the subject of tax-deferred exchanges: "The Deferred Exchange Regulations provide taxpayers with "safe harbors" which may be employed in structuring and securing both simultaneous and delayed tax-deferred exchanges. My purpose in what follows is to provide assistance in navigating the narrow channels created by the regulations through hazardous waters. The importance of staying within the channels is more critical today than prior to the issuance of regulatory guidance when a smattering of case law and a limited number of public rulings were the only channel markers. In the words of the Barker Court, 'At some point, the confluence of some sufficient number of deviations will bring about a taxable result.' The very existence of the safe harbors and bright line tests in the regulations create a burden on tax practitioners to make ever effort to structure exchanges within these guidelines, where the tax risk of the transaction can be minimized. Failure to meet the technical requirements of the safe harbors is likely to generate a number of malpractice claims in the future. The regulations provide practitioners with clear channels to safe harbors, but the sides of these channels, and you will dispose, sometimes magically, of the issues of agency, constructive receipt, the like-kind standard, and the exchange requirement. Venture outside the channels, and you invite disaster...practically speaking, auditing agents will probably disallow exchanges which do not meet the requirement of the safe harbors and leave the issue for resolution at the appellate conference. In fact, at the time of this writing (late 1994) auditing agents are recommending exchange transactions for litigation by the government where strict observance of the regulations is not apparent."

27. THE SAFE HARBORS TO COME OUT OF THE FINAL I.R.C. §1031 REGULATIONS ARE AS FOLLOWS:

1. Non-Cash Security for Buyer's Performance:
Mortgage or Deed of Trust
Standby Letter of Credit
Third Party Guarantee

2. Cash Security for Buyer's Performance:
Qualified Escrow Qualified Trust

3. Qualified Intermediary
The only Safe Harbor which also applies to a Simultaneous Exchange

4. Exchangers May Receive Interest After Completing The Exchange

28. WHAT ARE THE REQUIREMENTS RELATING TO THE IDENTIFICATION OF REPLACEMENT PROPERTY?
All replacement property to be acquired in the exchange must be "unambiguously described" by legal description, assessor's parcel number or tax map key or equivalent number, or address, distinguishable name, etc., and made in a written document executed by the exchanger and hand-delivered, mailed, telecopied or otherwise sent to a person involved in the exchange who is not a disqualified party - preferably the Intermediary. A single exception to the identification requirement is provided, which deems any replacement property actually acquired by the exchanger within the 45-day Identification Period to be duly identified property. You should document the sending and/or delivery of the identification letter and confirm their receipt. Every attempt should be made and reviewed for conformance and accuracy in advance of the last day of the Identification Period. A non-conforming identification sent by fax or mail and received by the Intermediary on the last day of an Identification Period which ends over a weekend, may at best be reviewed on the Monday following the expiration of the Identification Period. It would then be too late to make any required changes, resulting in an invalid exchange.

29. HOW MANY PROPERTIES MAY BE IDENTIFIED AS REPLACEMENT PROPERTY?
One of the following three rules must be followed when identifying single, multiple or alternative replacement properties:

1. Three properties of any value may be identified. This rule is known as the "Three Property Rule". You may acquire either one, two or all three properties identified.

2. Any number of properties may be identified, provided that as of the end of the Identification Period, the aggregate fair market value of all identified replacement property does not exceed 200% of the fair market value of all relinquished property. This rule is known as the "Two Hundred Percent Rule." You may then acquire any number of those properties identified.

3. Any number of properties may be identified, as long as the exchanger acquires replacement property whose aggregate fair market value is at least 95% of the aggregate fair market value of all identified properties. This rule is known as the "Ninety-Five Percent Rule."

30. MUST I RECEIVE ALL IDENTIFIED PROPERTIES?
Only if you have relied on the 95% Rule. In other words, you have identified more than three properties which aggregate more than 200% of the fair market value of the relinquished property. In such circumstances, the technical requirement is satisfied if you acquire 95% of the identified property. This rule, however, is very difficult to follow, as just one problem with one identified property could prevent you from acquiring 95% of all identified property.

31. HOW DO I IDENTIFY REPLACEMENT PROPERTY TO BE PRODUCED IN A BUILD-TO-SUIT EXCHANGE?
The Code provides that property not yet in existence is properly identified if the underlying land (together with any existing improvements) is identified, and the improvements to be constructed are identified in "as much detail as is practicable at the time of the identification." Plans and construction contracts should be referenced in the identification, providing for such documents to be later attached in the event they are not available within the Identification Period.

32. MUST MISCELLANEOUS PROPERTY TO BE RECEIVED IN THE EXCHANGE BE IDENTIFIED?
The Regulations provide that property which

(i) "is incidental to a larger item" and
(ii) "is typically transferred in standard commercial transactions" (appliances, etc.) and
(iii) "does not exceed 15% of the value of the larger item, need not be specifically and separately identified.

33. MAY I REVOKE IDENTIFICATIONS?
Identifications may be revoked, if such revocations are made in a written document, signed by the exchanger, and sent to the Intermediary before the end of the Identification Period. If the original identification was made in an exchange agreement, it may be revoked by an amendment to the exchange agreement, signed by and sent to all parties to the exchange agreement.

34. CAN THE IDENTIFIED REPLACEMENT PROPERTY BE MODIFIED OR ALTERED AFTER THE IDENTIFICATION PERIOD BUT BEFORE MY RECEIPT?
The replacement property received must be "substantially the same property" as that which was identified. While the rules for deferred exchanges appear to sanction exchanges in which 75% or more of any vacant land parcel identified is acquired, some confusion exists as to the application of this "rule". In a construction exchange, only "variations due to usual or typical production changes" are allowed. As a consequence, significant changes should not be made to property under construction, except within the Identification Period, during which time such identification can be revoked, amended and re-submitted.

35. WHY DO I NEED AN INTERMEDIARY?
An Intermediary is required in all transactions other than those outlined below:

(a) A two party simultaneous exchange. (*Please see note below.) Benefit: Simple and Cost-Effective NOTE: The only safe harbor recommended by the Treasury Department for simultaneous exchanges is the use of a Qualified Intermediary.
(b) The ABC Exchange, also called the Alderson or Reverse Missouri Waltz Exchange. (Buyer buys replacement property from the seller, and then exchanges it with the exchanger for the relinquished property. These steps all occur simultaneously.)
Problem:
(i) potential for hazardous waste liability to attach to buyer of replacement property, as buyer passes through the chain of title and deeds to the exchanger, and
(ii) the potential for liens, clouds and judgments which might be filed against the buyer of the relinquished property to attach to the replacement property, as the buyer enters the chain of title.
(c) The ABC Exchange, also called the Baird or Missouri Waltz Exchange. (The exchanger and the seller of the replacement property exchange properties, and the seller, who now owns the relinquished property, sells it to the buyer. These steps all occur simultaneously.) Benefit: Minimizes transfer tax consequences by having the double title transfer on the relinquished property, which has a lower value.
Problem:
(i) potential for hazardous waste liability to attach to seller of the replacement property, as seller passes through the chain of title on the relinquished property and deeds to the ultimate buyer, and
(ii) the potential for liens, clouds and judgments which might be filed against the seller of the relinquished property, as the seller enters the chain of title.
(d) The Pot Exchange, (any number of people put their "haves" and "wants" into one pot, and a single escrow officer or closing agent sorts everything out and delivers the appropriate "goods" to each party, whether that be property, cash or paper, etc. This is accomplished by a direct deed system, and must occur simultaneously.) Benefit: Avoids or minimizes transfer taxes or potential hazardous waste liability. Problem: Requires one very accurate and dedicated closing agent or escrow officer. A Qualified Intermediary is always required for the two remaining types of exchanges:
(e) The Simultaneous Exchange With an Intermediary, and
(f) The Delayed Exchange With an Intermediary.

36. WHAT IS A "QUALIFIED INTERMEDIARY?"
An Intermediary is that entity or person who:

(a) acts as the middle-man or "straw-man" in exchange transactions;
(b) holds the proceeds of the sale of the relinquished property;
(c) does any buying of replacement property or selling of the relinquished property necessary on behalf of the exchanger. The Intermediary typically acquires the relinquished property from the exchanger and sells it to its ultimate buyer, using the proceeds of the sales to acquire and convey to the exchanger the replacement property. Your Intermediary should be a corporation rather than an individual in order to protect against your Intermediary's death, disability, incapacity, judgment liens, etc. Furthermore, intermediaries should offer mechanisms and procedures designed to protect your transactions, together with any funds held, through the use of letters of credit, third party guarantees, bonding and Errors and Omissions insurance. It is also extremely important for an Intermediary to employ proper custodial procedures for sale proceeds and other funds held in segregated, restricted accounts, through the use of a "Qualified Escrow" or a "Qualified Trust". The final rules for tax-deferred exchanges created a new category of accommodator or facilitator called a "Qualified Intermediary," and provided for certain tests which must be met in order to "qualify." In addition, these rules prescribe certain procedural requirements which all Qualified Intermediaries must meet, together with prerequisite use of an exchange agreement containing express and specific language. As the Internal Revenue Service has vowed to pursue any taxpayers who use accommodators in deferred exchanges other than Qualified Intermediaries, exchangers should be extremely careful not to breach this requirement.

37. WHAT DOES A QUALIFIED INTERMEDIARY DO DURING AN EXCHANGE?
The Intermediary typically serves many functions during an exchange:

1. If the exchanger actually or "constructively" receives any or all of the proceeds of the sale of the relinquished property, the exchange will not be valid. (This rule would not apply to a percentage exchange, where the exchanger may receive the percentage of the sale proceeds which result from the percentage of the sale not included in the exchange.) In order to insulate the exchanger from such "constructive receipt", the Intermediary holds the proceeds of the sale of the relinquished property in a segregated, restricted account.

2. To qualify for tax deferment under I.R.C. Section 1031, exchanges must be pursuant to a written exchange agreement. Some intermediaries provide this documentation, precluding the exchanger's needs to engage separate legal counsel to prepare the exchange agreement. As significant additional costs are incurred if the exchanger must engage counsel to draft such documentations, XSI provides the exchange agreement and all other required exchange documents at no additional cost.

3. Tax-deferred exchanges must, in essence, constitute a reciprocal exchange of properties between two parties, notwithstanding the fact that there are almost always three, four or occasionally more than four parties participating in an exchange. An important role of the Intermediary is to become the exchanger's other party to the exchange. Technically, the exchanger is trading property with the Intermediary. This explains why the relinquished property is conveyed to the Intermediary first, and then to the ultimate buyer. Likewise, the replacement property is transferred first to the Intermediary and then to the exchanger.

4. Exchange transactions are often extremely complex. A good Intermediary helps explain, conform and manage all aspects of the transaction, facilitating document signatures, escrow closing and the timely cooperation and performance of the parties to the exchange.

38. CAN ANYONE BE A QUALIFIED INTERMEDIARY?
No. "Disqualified Persons" may not be Qualified Intermediaries. With limited exceptions, a Disqualified Person is any party who has acted as your agent, employee, attorney, accountant, investment banker/broker, or real estate agent or broker within the two-year period ending on the date of the first transfer of any relinquished property. Also disqualified are the family members of the Disqualified Persons, as well as partnerships, corporations and other entities in which you, or your related party, own directly or indirectly, more than a 10% interest.

Example: Your attorney owns 11% of the stock in his law firm, and his wife owns her own Intermediary firm. You wish to use his wife's Intermediary firm as your Qualified Intermediary. If your attorney has done any work for you in the last two years, other than strictly I.R.C. Section 1031 tax-deferred work, his wife's firm is "disqualified" to act as your Qualified Intermediary. Conversely, if ten law firms each own 10% of a corporation organized to act as a Qualified Intermediary, you could use that Qualified Intermediary even though your law firm was one of the ten owners.

39. CAN I EXCHANGE MY PARTNERSHIP INTEREST IN REAL ESTATE?
No, with extremely limited exception. After much confusion, the Internal Revenue Code was amended in 1984 to specifically prohibit the exchange of partnership interests. Similarly, the exclusion clarified the law that a partnership interest, whether general or limited, cannot be exchanged for an interest in real property without recognition of gain. Some highly technical and relatively complex structures have been employed in an attempt to legally circumvent the restrictions against exchanges of partnership interests. Skilled legal and/or accounting counsel must be engaged for such transactions.

40. CAN I CONVERT MY PARTNERSHIP INTEREST INTO A TENANT-IN-COMMON OR SIMILAR INTEREST JUST BEFORE OR JUST AFTER MY EXCHANGE?
It is generally accepted that, if a partnership is dissolved and the partner's partnership interest are converted upon distribution into divided or undivided real property ownership interests, the partners may then be able to trade such real property interests under I.R.C. Section 1031, provided that the partnership dissolution and distribution occurs long enough before or after the exchange to satisfy the "held for investment" requirement. Such liquidation and/or conversion of partnership interest involves highly technical questions and favorable treatment of such transactions is by no means assured. Exchangers must secure qualified legal or accounting counsel before attempting these transactions.

41. CAN MY PARTNERSHIP AS A WHOLE TRADE REAL ESTATE OWNED UNDER I.R.C. §1031?
Yes! Partnerships and corporations are legal entities and, as such, are not prohibited from exchanging partnership property (as opposed to a partner's partnership interest) under I.R.C. Section 1031. Remember, these transactions necessarily involve the entire partnership trading its real property interest.

42. WHAT KIND OF REAL ESTATE QUALIFIES FOR A 1031 EXCHANGE?
Generally, real property of "like-kind" which is not identified as condemned property (a 1033 exchange) or your personal residence (a 1034 exchange), and was not acquired for resale or considered inventory or dealer property may be traded under the I.R.C. Section 1031 exchange rules. The property relinquished in the exchange must have been either productively used in your trade or business, or held for investment, i.e., you must have effected a "qualified use" of the property. Likewise, it must be your intention as you acquire your replacement, to either hold that property for investment or use it for a business purpose.

43. IS THERE ANY PROPERTY WHICH MAY NOT BE TRADED UNDER I.R.C. §1031?
Yes. The following property is specifically excluded under I.R.C. Section 1031 and therefore cannot be of "like-kind":
1. Stock in trade or other property held primarily for sale;

2. Stocks, Bonds, Notes or other Securities or Evidence of Indebtedness or Interest;

3. Interests in a Partnership;

4. Certificates of Trust or Beneficial Interest;

5. Chooses in Action;

6. Real Property located within the United States is no longer like-kind with Real Property located outside of the United States.

44. HOW LONG MUST I HOLD PROPERTY RECEIVED IN AN EXCHANGE?
How long one must hold property in order to qualify for tax deferment under I.R.C. Section 1031 is unclear. While it is generally accepted that a one-year to two-year period may be sufficient, there is no statutory holding period. Although the IRS has taken the position that a transaction will not qualify under 1031 if a property acquired is immediately disposed of (particularly if such disposition is prearranged), conflicting precedents exist. Exchangers are well advised to use extreme care in structuring exchanges of property with short holding periods and quick resale.

45. CAN FOREIGN PROPERTY BE EXCHANGED?
As a result of the Revenue Reconciliation Act of 1989, real property located within the United States and real property located outside of the United States are no longer of like-kind. However, foreign property may still be exchanged for other foreign property.

46. CAN A LEASEHOLD PROPERTY BE EXCHANGED?
Special provisions apply to leasehold property. While owners of leasehold property do not possess a fee simple interest, a leasehold of 30 years or longer (including optional renewal periods) is deemed to be of like-kind to fee simple property. Leaseholds of less than 30 years duration may only be traded for other leasehold property with remaining lease terms of less than 30 years. Again, remember that optional renewal periods are included in determining whether a lease for a period of years is of like-kind.

47. CAN I EXCHANGE MY PRINCIPAL RESIDENCE UNDER I.R.C. §1031?
No. Personal residences should be exchanged under the relatively less demanding provisions of I.R.C. Section 1034 and cannot be exchanged under I.R.C. Section 1031.

48. WHAT ARE SOME OBVIOUS EXAMPLES OF PROPERTY THAT MAY NOT QUALIFY FOR EXCHANGE?
In addition to the non-qualifying property previously discussed, examples of property which probably will not meet the qualified use test are:

(a) Land which was acquired for the express purpose of subdivision and resale and only held long enough to effect such subdivision and resale;
(b) Homes held for sale by speculation builders, such as builder's inventory of unsold homes;
(c) Any transaction which constitutes a sale followed by a reinvestment in other property, whether or not the replacement property is considered to be like-kind, wherein the transfers are no reciprocal and interdependent, and are absent in an exchange agreement.

Tripartite Escrow Corporation

Providing Tripartite escrow Agreements since 2001.

28.102-1 -- General.