Guide to 1031 Property Exchange
The deference of tax liability and maximizing of profits are the main benefits of the 1031 property exchange, while helping to continue with the investment of the capital. 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. So only like-kind properties are involved in a 1031 exchange.
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. As the name implies, simultaneous exchange is selling and buying that happens at exactly the same time. In delayed exchange, property is sold and the replacement property 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. There is some use of capital to improve the property in improvement exchange. Personal property exchange can also comes under like-kind exchanges other than real estate. These exchanges can be done with cattle, aircraft, mineral rights, etc, but with like-kind property.
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.
The property owner who is interested in a 1031 exchange talks to a qualified intermediary (QI), or facilitator, in order to plan out the whole transaction. 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. Then the facilitator converts the sales transaction into an exchange deal through specialized documentation.
There is notification sent to certain parties about the transaction and intent to exchange. The real estate agent, the closing agent, the accountant, and the attorney are the parties notified of the intent to exchange.
By collecting the information required, the facilitator is able to prepare the exchange documents. The closing agent is then given these documents for execution during closing. Review of the documents by the parties involved follows. So when the closing is fulfilled, the property is transferred to the QI to sell to the buyer simultaneously. The QI holds the proceeds of the sale until the replacement property is bought.
In delayed exchange, the exchanger has 45 days from the closing date of the relinquished property to find a 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.