On the calendar, 10/31 suggests trick-or-treating. In the Internal Revenue Code, Section 1031 is a little bit like that, too; when you sell a piece of property, you can either watch glumly as the government imposes a tax on your capital gains, or you can treat yourself to a tax deferral by putting the sale proceeds into the purchase of another property.

For the past 14 years, West Des Moines-based Iowa Exchange has played a specialized role in that process, serving as a qualified intermediary. As such, the two-woman company performs specific duties required by law: It holds the proceeds between transactions and prepares the legal documents that link the sale of one property and the purchase of another as a qualified exchange.

Section 1031 has been part of IRS regulations for decades, but it’s probably safe to say that more people outside the real estate industry are aware of it now than a few years ago. “It has become a really valuable tool,” said Iowa Exchange co-owner Jo Kline Cebuhar. As the stock market has become dicey and interest rates on bonds and certificates of deposit have stayed low, more ordinary investors have looked to real estate. “Our business has gone up every year since I started, and there’s no reason to think that won’t continue,” Cebuhar said.

The company spun off from Iowa Escrow, which was founded in 1988 by Cebuhar, who had been an associate corporate counsel at Iowa Realty and president of Iowa Mortgage. “When a law created intermediaries in 1991, people came to us, because we were the only escrow people around,” Cebuhar said. “In 1996, we began phasing out home closings, and we quit doing them in 1999.”

By then, Sheryl Empey had become a co-owner of the company; prior to that, she had worked on real estate closings at Iowa Realty and Iowa Realty Commercial.

If they lived in any other state, chances are they wouldn’t be in this business. Iowa is the only state that doesn’t allow the sale of title insurance as part of property transactions, and Cebuhar said, “in other states, most of the title insurance companies have their own property exchange departments.”

The average deposit with Iowa Exchange is about $374,000. The cash from each transaction is deposited in its own separate money market account paying interest at a rate that’s 25 basis points over the federal funds rate, which works out to 4 percent now. “The average client earns our fee in 24 days,” Cebuhar said. That fee is $1,000.

Two-thirds of Iowa Exchange’s business comes from outside the Golden Circle. Many of those deals involve farmland. “Farmers stick with farmland,” Cebuhar said. “Non-farmers buy farmland for appreciation.”

In Greater Des Moines, it’s more common to see the sale of a building linked to the purchase of another one. “Any time you see anything sell, most of the time it will be an exchange,” Cebuhar said. “If you’re going to buy another piece of property within the next six months, you’d be nuts not to exchange.”

THE RULES

In general terms, here are the requirements you must follow to complete a 1031 exchange:

Both the property you sell and the property you buy must be held for investment purposes. Your personal residence is not considered an investment property. Typically, you have to hold each property for a year and a day to qualify for a 1031 exchange.

From the day you close the sale of your old property, you have 45 days to complete a list of properties you want to buy.

From the day you close the sale of your old property, you have 180 days to close on the purchase of one or more of the properties on your 45-day list.

You may not take possession of the money during the time between the sale of your old property and the purchase of your new property. By law, you must use an independent third party, called a qualified intermediary, to hold your proceeds.

You must take title to the new property in exactly the same way that you held title to the old property. (If you held the old property as John Smith, you cannot buy the new property as Smith Investment Corp.)

To defer 100 percent of the capital gains tax, you must buy a property that is equal to or higher in value than the one you sold. You must reinvest all of the proceeds from the sale into the new property.

TIME FOR A CHANGE?

The subject of 1031 exchanges will be on the agenda when the Iowa Farm Bureau Federation holds its annual meeting in Des Moines in November. “We would like to see changes in the capital gains taxes paid on the sale of farmland, and we would prefer to eliminate them,” said Don Petersen, the Farm Bureau’s director of government relations.

The desire to avoid paying those taxes drives many 1031 deals in Iowa, and Petersen said they, in turn, contribute to the steady increase in farmland prices. The 100 voting delegates to the convention are expected to consider several aspects of the 1031 provision. For example, he said, “if the length of time allowed for transactions could be extended, that would lessen some of the urgency to find land to buy; there’s not a lot of land for sale at any one time. Also, we will discuss things like looking at the definition of like-kind exchanges, possibly narrowing the use of farmland exchanges to active farmers.”

At the federal level, Iowa Sen. Charles Grassley also is looking at 1031 exchanges.

In a statement issued by his office, Grassley said: “I continue to be concerned that 1031 exchanges of trade business or investment property may be influencing the most recent round of farmland price increases seen in Iowa. Increased land prices make it more difficult to get young and beginning farmers into farming. So, we’ve been taking a serious look at potential reforms of Section 1031 of the tax code. These reforms would focus on … failure to report and failure to file the appropriate tax returns.“