Why can’t I just exchange my precious metals (Part 7)
Section 1031 is unique in the U. S. Tax Code. It is not a self help provision. Every exchange must involve an Exchange Company to authenticate the exchange and to carry out the technical requirements of Section 1031. Failure to adhere to the technical requirements results in taxation of gains.
- The contract for the sale and delivery of the precious metal must assign the rights to receive the proceeds from the sale to an Exchange Company to place into a special bank account known as a qualified escrow account. No assignment, no exchange.
- The qualified escrow bank account and the escrow holder (Bank) must agree to be governed by the tax provisions in Treasury Regulation 1.1031(k)-1(g)(6). If the language is not in the escrow account or the escrow holder does not agree, then exchange fails. Very few Banks have these type of accounts. It is simple enough for the IRS to ask the Bank if they maintain a QEA bank account. If they don’t, then the exchange failed.
- The sale and delivery agreement must state that the sale of the precious metal is subject to Section 1031 and the other party must agree to those terms and sign an acknowledgement. No acknowledgement, no exchange.
- The investor must provide a specific written identification within 45 days of the precious metals he or she intends to acquire to the Exchange Company. No identification, no exchange.
- The Exchange Company procures and delivers payment for the replacement asset on behalf of the investor to be received within 180 days of the sale.
- The sale and purchase must be reported on Form 8824 and attached to your income tax return for the year of sale.
- Identical Parties. For example, if Adam sells his gold to Brad and buys his replacement coins from Carl, an Exchange Company needs to be involved.
- A Dealer may not act as an Exchange Company. Nor can your friends, relatives, employees, partners, business associates, lawyer, accountant or other agents or brokers.
- A simultaneous exchange of physical assets over the counter may be treated as an exchange as long as it falls within the category of permissible exchanges (see part 4). Any time delay or delay in receipt of physical possession receipt of cash requires an Exchange Company.
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