1031 Property Exchange Procedures
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. To benefit from a 1031, you need to purchase like-kind property in exchange of the property you sold.
1031 exchanges come in five different types. The five types of 1031 exchange includes the simultaneous exchange, the delayed exchange, reverse exchange, improvement exchange, and personal property exchange. In the simultaneous exchange, one property is sold and the next is bought at exactly the same time. 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. When capital is used to improved the property, then we call it improvement exchange. Personal property exchange can also comes under like-kind exchanges other than real estate. These exchanges can include cattle, aircraft,mineral rights, and others.
There are substantial variations in the processes of these different types of exchanges. 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. Through specialized documentation, the sales transaction is converted into an exchange deal by the facilitator.
There is notification sent to certain parties about the transaction and 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. After closing, the exchanger will transfer the relinquished property to the QI, who would them simultaneously sell the property to the buyer. The QI holds the proceeds of the sale until the replacement property is bought.
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.