Guide to 1031 Property Exchange
The 1031 Property Exchange offer wonderful opportunities to defer tax liability and maximize profits 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. IN a 1031 exchange, only like-kind properties are involved.
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. When a property is sold at the same time another property is bought, then this is the simultaneous exchange. 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. 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. 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 most common and most popular type of 1031 exchange is the delayed exchange.
In delayed exchange, the first step is planning out the whole transaction by talking to a qualified intermediary, called a 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.
Parties are then notified about the transaction and the intent to exchange, having decide to perform an 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. 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. Until the replacement property is bought, the proceeds of the sale is handled by the QI.
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 QI then will purchase the property that was identified by the exchanger and transfer it to him in due time to complete the exchange.