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 five types of 1031 exchange includes the simultaneous exchange, the delayed exchange, reverse exchange, improvement exchange, and personal property exchange. As the name implies, simultaneous exchange is selling and buying that happens 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. Reverse exchange has the replacement property bought before the initial property is sold. There is some use of capital to improve the property in improvement exchange. In personal property exchange, you exchange your property with a like-kind property. Cattle, aircraft, mineral rights, etc. are examples of personal property that can fall under personal property exchange.
There are substantial variations in the processes of these different types of exchanges. The most common and most popular type of 1031 exchange is the delayed 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 specialized documentation is prepared by the facilitator converting the sales transaction into an exchange deal.
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.
By collecting the information required, the facilitator is able to prepare the exchange documents. During closing, the closing agent executes the documents forwarded to him by the facilitator. Review of the documents by the parties involved follows. The QI will then sell the property to the buyer after the closing. 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. To complete the exchange, the QI will purchase the replacement property identified and transferred to the exchanger in due time.