1031 Property Exchange Procedures
The benefit of the 1031 Property exchange is to be able to defer tax liability and to maximize profit while continuing with capital investment. You are only required to exchange properties that are like-kind and the property your gave up and the property you receive must be used for either 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.
You can have a 1031 exchange for any of these types. The simultaneous exchange, the delayed exchange, reverse exchange, improvement exchange, and personal property exchange are the types of 1031 exchange. When a property is sold at the same time another property is bought, then this is the simultaneous exchange. In delayed exchange, property is sold and the replacement property 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. There can be 1031 exchanges that does not involve real estate but are also like-kind exchanges and these are called personal property exchange. These exchanges can include cattle, aircraft,mineral rights, and others.
Each of the processes in these different types of exchanges vary substantially. Among the different types of property exchanges, the most common and popular types is the delayed exchange.
The first step in delayed exchange is the planning stage where the property owner talks to a qualified intermediary (QI) called the facilitator. The facilitator ascertains the investment objectives of the seller or exchanger and suggests the right option after estimating the amount of potential capital gains and the resultant tax outgo involved.
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 real estate agent, the closing agent, the accountant, and the attorney are the parties notified of the intent to exchange.
Exchange documents are then prepared by the facilitator by collecting required information. During closing, the closing agent executes the documents forwarded to him by the facilitator. The documents are then reviewed by the different parties involved. The QI will then sell the property to the buyer after the closing. Until the replacement property is bought, the proceeds of the sale is handled by the QI.
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.