1031 Exchange – Denver, Colorado
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Colorado’s top 1031 exchange company
A 1031 exchange allows investors and business owners to defer taxes on their real estate transactions. This leads to more capital for your next project — which, in turn, means access to higher returns and larger asset classes.
Founded in Denver in 1994, 1031X has a great love for the Mile High City! Our headquarters remain off I-25 and Hampden Ave.
Real estate investors have trusted 1031X as the Denver 1031 exchange company of choice. As of 2021, 1031X safely handled over $3 billion in exchange transactions for its clients, many of whom live in Colorado.
Remember, the IRS requires investors to use an intermediary for all exchanges; all such transactions should be overseen by an expert. Thanks to its tenure, transaction volume, and customized service, it’s easy to understand why 1031X is the leader in the market. They earn that reputation day by day, deal by deal.
Facts about Denver, Colorado
The population has grown by 17% since 2010. This ranks Denver as the 19th most populous city in the United States.
Denver is the capital of the state of Colorado. The city has a population of roughly 716,000 people (as of 2017), making it the largest city in the state as well.
As of 2017, the Denver metro area has a population of more than 3.5 million people. It is the 15th-largest metropolitan area in the United States.
Denver is commonly referred to as the Mile High City because its elevation is 5,280 feet (1 mile) above sea level. Denver rests at the base of the Rocky Mountains, a beautiful backdrop behind the city’s growing skyline.
Denver has been, and remains, a top market for 1031 exchange transactions.
Real estate investment in Colorado
The real estate market in Denver enjoys a growing population and significant tourism.
One of the largest effects of tourism can be seen in the volume of short-term property leases for vacation.
AirBnB reported 325,000 visits to Denver in 2017, creating $51 million in rental income for the host properties. That number grew to 477,000 visits and $74.6 million in income to host properties in 2018. Given the city’s access to the mountains, it benefits from recreational tourism year-round.
A significant portion of the vacation rental market is made up of real estate investors. The state of Colorado boasts 19,000 AirBnB hosts that yielded $309 million in 2018.
It is said that a rising tide lifts all ships, and that is certainly true of population growth and the real estate market. The state of Colorado has an estimated annual population growth of 1.36%, making it the second fastest growing state in the country. The state also enjoys strong jobs growth and low unemployment. Many experts to anticipate continued population growth.
1031 exchange in Colorado — what’s different?
Every state has its quirks. What 1031 tax rules do Colorado investors need to know about?
We used to see much more deviation in 1031 treatment among the various states.
Some states did not recognize 1031 exchanges for any state tax deferral (Pennsylvania) or only recognize them under very limited circumstances (Indiana).
Luckily, most of that changed during the past 10 years. (Except in Pennsylvania, which still uses unique and antiquated rules that disallow most 1031 exchanges.)
Even so, every state has unique rule structures for like-kind exchanges.
Here is what Colorado requires.
Do you need 1031 exchange language in a Colorado contract?
In a way, yes.
But, technically, no.
You should consider the following before signing a purchase and sale agreement as part of a 1031 exchange.
Is the purchase and sale agreement assignable to a qualified intermediary?
How will your counterparty know that a 1031 exchange will happen?
Most 1031 exchanges involve direct deeding, and the qualified intermediary shows up on the settlement statement rather than the taxpayer. This requires an assignment of contract. (Per IRS rules)
To be clear, the IRS does not require specific 1031 language in the contract.
The IRS does require that the counterparty be made aware of the 1031 exchange and sign some document consenting to it. This can be taken care of at any time prior to the settlement; it does not have to be part of the contract.
That said, if you do want to include 1031-specific language in a Colorado real estate contract, use the following.
Selling your relinquished property
Buyer acknowledges that seller intends to execute an I.R.C Section 1031 tax-deferred exchange, and buyer will cooperate in such an exchange. Seller agrees to hold buyer harmless regarding any and all claims, costs, timing delays, or other liabilities resulting from the exchange process. Buyer also agrees to an assignment of contract to a qualified intermediary by seller.
Buying your replacement property
Seller acknowledges that buyer intends to execute an I.R.C Section 1031 tax-deferred exchange, and seller will cooperate in such an exchange. Buyer agrees to hold seller harmless regarding any and all claims, costs, timing delays, or other liabilities resulting from the exchange process. Seller also agrees to an assignment of the purchase and sale agreement to a qualified intermediary by buyer.
Our office prefers that our clients, particularly our buyers, avoid 1031 exchange language in their purchase contracts.
Why do we recommend this?
We don’t want you to lose any leverage in your negotiations. A savvy seller with knowledge about 1031 exchange deadlines and restrictions could play hard-ball with purchase price or closing dates.
Is it true that Colorado 1031 exchange companies do not commingle their clients’ money?
Yes, this is true.
In 2009, in the wake of the Great Recession, the Colorado State Assembly passed a new law that limited the activities of qualified intermediaries (and other 1031 facilitators).
This was the motivation behind the 2009 law
“To protect taxpayers who engage exchange facilitators should meet certain requirements and follow certain procedures.”
Colorado followed in the footsteps of Nevada and California, which passed similar laws.
Importantly, the 2009 QI Act prohibits any exchange facilitator based in Colorado or doing business in Colorado from the following
Commingling (i.e. mixing assets from multiple clients) exchange funds within operating accounts
Loaning or transferring funds to an unaffiliated entity in a 1031 exchange, unless that entity is an Exchange Accommodation Titleholder.
This is why 1031X opens up a safe, separate, segregated Qualified Escrow Account for each individual client.
The QEA offers added protection in addition to holding funds in non-commingled accounts. Indeed, the qualified intermediary (1031X) cannot move funds in or out of the account without a written request, signed by the 1031 client, stating the amount, destination, and instructions for the transfer.
Does the Colorado withholding tax apply to 1031 exchange transactions?
No, so long as the seller signs an “Affirmation of Reasonably Estimated Tax to be Due.”
Like many states, Colorado assesses a withholding tax (2% in this case) on the sale of property by non-residents. Basically, this means that Colorado requires the seller to set aside money and withhold it for the purposes of paying taxes owed on the income from the property.
Here’s an example.
A real estate investor living in Hawaii owns a mountain condo in Aspen, CO. They decide to sell. Well, the Colorado Department of Revenue steps in and requires a 2% mandatory withholding tax.
But, as you know, a 1031 exchange defers the tax liability.
With this form, the investor in Hawaii can effectively tell the Colorado government “sorry, I won’t actually owe any taxes on this,” and thereby receive an exemption from the 2% withholding requirement.
Get answers to frequently asked questions about 1031 exchanges.
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