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.
1031 exchanges come in five different types. The simultaneous exchange, the delayed exchange, reverse exchange, improvement exchange, and personal property exchange are the types of 1031 exchange. In the simultaneous exchange, one property is sold and the next is bought at exactly the same time. If the property is sold and the replacement is bought within 180days, it is called delayed exchange. 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. 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 delayed exchange is the most common and most popular type of 1031 property 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.
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.
The facilitator then prepares the exchange document by collecting information required. During closing, the closing agent executes the documents forwarded to him by the facilitator. 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.