Frequently Asked Questions: Answers

  1. What is a 1031 Like-Kind Exchange (LKE)?
    A Section 1031 Like-Kind Exchange (LKE) allows companies to defer recognition of taxable gain on the sale of business assets or real estate when they use the proceeds to acquire "like-kind" assets. In many cases this gain may exceed 40% of the total sale price. LKEs are governed by Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations.
  2. Do I have to buy and sell through Ritchie Bros. to do a Like-Kind Exchange through Accruit?
    No: it does not matter which channels you buy and sell through.
  3. What are the requirements for a valid exchange?
    • Qualifying property - Certain types of property are specifically excluded from Section 1031 treatment. However, if property (real or personal) is not specifically excluded, it can qualify for tax-deferred treatment.
    • Proper purpose - Both the relinquished property (sold equipment) and replacement property (new equipment) must be held for productive use in a trade or business or for investment.
    • Like-kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. Personal property that is relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States. Like-kind status is defined by General Asset Class and NAICS codes, which are available online.
    • Exchange requirement - In most cases, the law requires the exchange to be facilitated by a Qualified Intermediary (QI), a "disinterested third party" who assists the taxpayer in meeting the requirements of Section 1031.
    • Timeline – A replacement property must be identified within 45 days of the sale of the relinquished asset. The replacement asset must be purchased  within 180 days of the sale.
  4. What assets qualify for a Like-Kind Exchange?
    Personal property or real estate assets used in your place of business may qualify for a Like-Kind Exchange program. "Personal property" is the tax code term that refers to any non-real estate asset. Off-lease assets may also qualify for a Like-Kind Exchange program. Assets must be of a similar type but need not be of the same quality or age. In addition, they don't necessarily need to be the same type of equipment. A dozer is like-kind to a scraper, for example. An Accruit representative can explain what's like-kind to the asset you are selling.
  5. Is my contract with Ritchie Bros affected by my decision to put my assets in a Like-Kind Exchange program?
    No, your contract with Ritchie Bros. does not change. You will be required to execute an agreement with Accruit for the purposes of putting your assets in a Like-Kind Exchange program and you will notify Ritchie Bros. that you are doing an LKE. These tasks are easily accomplished online and by fax. Once an agreement is signed, there is no obligation to do an exchange until the sales proceeds are received by Accruit.
  6. Do I need to sign up for a Like-Kind Exchange program before my asset(s) are sold?
    Yes, an exchange agreement with Accruit must be signed prior to asset disposal. Pursuant to the safe harbor statutes of Section 1031 of the Internal Revenue Code, you must notify buyers of your Like-Kind Exchange program prior to sale.
  7. How much time do I have to complete my LKE?
    You have up to 180 days from sale date of your original property to purchase replacement property. You must identify the replacement property to be purchased within 45 days.
  8. What are the benefits of exchanging versus selling?
    A 1031 exchange is one of the few techniques available to postpone (potentially indefinitely) or potentially eliminate taxes due on the sale of qualifying properties.
    • By deferring the tax, you have more money available to invest in other assets (equipment). In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes.
    • Any gain from depreciation recapture is postponed.
    • You can defer recognition of taxable gain when acquiring and disposing of assets to reallocate your investment portfolio.
  9. Is my company's money safe with Accruit?
    Funds sent to Accruit in the course of executing an exchange are deposited directly to escrow accounts held in America's top-rated financial institutions. Additionally, Accruit is fidelity bonded and Errors and Omissions insured. While open to other alternatives (e.g. ACH), Accruit currently receives and sends funds by means of secure bank-to-bank wire transfers or checks. Our preferred option is wires, which minimize the physical handling of client funds and increase overall security. Escrowed funds are currently invested in money market funds that invest primarily in government securities, commercial paper, repurchase agreements, short-term bonds and other money funds. Principal is protected by the short-term nature of the fund's investments (average maturity 25 days), but yields vary with the market. Interest is calculated daily and accrued monthly.
  10. Is Accruit's process secure?
    Accruit has no higher priority than the security of our clients’ funds and data. We employ uncompromising industry best practices, partner with the highest rated financial institutions in the nation and rely on the most rigorous data security processes available anywhere. We hold a seat on the board of the Federation of Exchange Accommodators, and as such are in full compliance with its stringent code of ethics. Our operational standards not only meet the requirements of all existing state 1031 regulations, in most cases we exceed them significantly.
    • All client funds are held in secure, segregated accounts; client monies are never comingled with Accruit operating funds.
    • Client funds are held in the top-rated bank in America and investment procedures assure 100% liquidity>
    • Accruit is fidelity bonded and errors and omissions insured.
    • Program client information is held in a national data center that has annually has been audited and approved for ISO 9001 and SAS 70 certification processes. More than 300 proprietary ISO-compliant processes reduce human error and enhance reliability.
    • Only the latest and most reliable security solutions are employed to provide 24/7/365 Internet surveillance, secured access monitoring and tracking, encryption and certification, proprietary software, multiple physical layers of security and multiple layers of redundancy.
    • When appropriate, backup data is stored at an off-site vault managed by a leading global provider of data protection and recovery services.
  11. When can I take money out of the exchange account?
    Once the money is deposited into an exchange account, funds can only be withdrawn in accordance with tax regulations. The taxpayer cannot receive any money until the exchange is complete. If you want to receive a portion of the proceeds in cash, this must be done before the funds are deposited with the Qualified Intermediary.
  12. What is a Qualified Intermediary (QI)?
    A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The QI cannot be the taxpayer or a disqualified person.
    • Acting under a written agreement with the taxpayer, the QI acquires the relinquished property and transfers it to the buyer.
    • The QI holds the sales proceeds, to prevent the taxpayer from having actual or constructive receipt of the funds.
    • Finally, the QI acquires the replacement property and transfers it to the taxpayer to complete the exchange within the appropriate time limits.
  13. What is safe harbor?
    Safe harbor refers to adhering to the guidelines set forth in the regulations of the Internal Revenue Code. Safe harbor provides security to the taxpayer; by following the accepted rules, the taxpayer is assured of compliance with the purpose and structure of the tax code.
  14. What is constructive receipt?
    Constructive receipt is when the taxpayer has the ability to receive, pledge, borrow or obtain the benefit of the exchange funds. This includes having money (or property) from the exchange credited directly to your bank account or having direct access to the sales proceeds. Being in constructive receipt of exchange funds (or property) frequently results in the disallowance of the Like-Kind Exchange, thereby creating a taxable sale.
  15. Are LKEs approved by the IRS?
    The origins of Section 1031 Like-Kind Exchanges date back to 1921. In recent decades, various decisions and rulings have successively reinforced the validity of Like-Kind Exchanges and extended their application to deferred exchanges (§1031) and, during 2000, to reverse exchanges (where the exchanger is allowed to buy first and sell the relinquished property (Rev. Proc. 2000-37)). Like-Kind Exchanges are common in the real estate industry, with the Federation of Exchange Accommodators estimating that up to $100 billion in exchanges occur annually. Although they have been less common for personal property, they're solidly grounded in tax law and follow the same tax code.  
  16. Is Accruit different than a tax advisor or accountant?
    Accruit is neither a tax advisor nor an accounting service; by law, QIs are not allowed to provide tax advice. Consult your tax advisor or accountant for questions concerning your specific situation. Accruit does not provide a legal service. Consult your attorney if you have concerns regarding specific legal issues.