Guide to 1031 Property Exchange
The benefit of the 1031 Property exchange is to be able to defer tax liability and to maximize profit while continuing with capital investment. The main requirements for the exchange is that it is a like-kind exchange where the property you give up and the property you receive must be held by you for investment or for productive use in trade or business. To benefit from a 1031, you need to purchase like-kind property in exchange of the property you sold.
There are five types of 1031 exchanges. The simultaneous exchange, the delayed exchange, reverse exchange, improvement exchange, and personal property exchange are the types of 1031 exchange. In the simultaneous exchange, one property is sold and the next is bought at exactly the same time. The delayed exchange is an exchange where the property is sold first and the replacement is bought within 180 days. When the replacement property is bought first before the initial property is sold then this is called the reverse exchange. Improvement exchange uses some of the capital to improve the property. There can be 1031 exchanges that does not involve real estate but are also like-kind exchanges and these are called personal property exchange. Cattle, aircraft, mineral rights, etc. are examples of personal property that can fall under personal property exchange.
When these exchange are processed you can expect substantial differences. The delayed exchange is the most common and most popular type of 1031 property exchange.
In delayed exchange, the first step is planning out the whole transaction by talking to a qualified intermediary, called a facilitator. What the facilitator does is to ascertain the objective of the property seller or exchanger and makes suggestions as to the right options once he has estimated the amount of potential capital gains and the tax deferred.
The next step is to draft a standard purchase and sale agreement, stating the exchangers intent to exchange the property and obtaining the buyer’s consent to cooperate. Through specialized documentation, the sales transaction is converted into an exchange deal by the facilitator.
When the exchange is decided, certain parties are informed about it and the intent to exchange. The parties involved are the real estate agent, closing agent, accountant, and attorney.
Exchange documents are then prepared by the facilitator by collecting required information. The closing agent is then given these documents for execution during closing. The documents are then reviewed by the different parties involved. So when the closing is fulfilled, the property is transferred to the QI to sell to the buyer simultaneously. The proceeds go to the QI and held by him until the acquisition of the replacement property is over.
In delayed exchange, from the date of closing the relinquished property, the exchanger gets 45 days to identify the replacement property and 180 days to complete the exchange. The identified replacement property is purchased by the QI and transferred to the exchanger in the stipulated time, making the exchange complete.