Smart Ideas: Properties Revisited

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. This like-kind exchange of property is the requirement for the 1031 property exchange, meaning that the property you gave up and what you are acquiring are the same kind with the same use, either for investment or to be used in productive 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 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. The delayed exchange is an exchange where the property is sold first and the replacement is bought within 180 days. In reverse exchange there is a reversal seen in the way the replacement property is bought first before selling the initial property. When capital is used to improved the property, then we call it improvement exchange. In personal property exchange, you exchange your property with a like-kind property. These exchanges can be done with cattle, aircraft, mineral rights, etc, but with like-kind property.

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.

Then purchase and sales agreements are drafted stating the intent of the seller or exchanger to exchange the property with the cooperation of the buyer. Then the facilitator converts the sales transaction into an exchange deal through specialized documentation.

There is notification sent to certain parties about the transaction and 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. The documents are then reviewed by the different parties involved. 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, 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. To complete the exchange, the QI will purchase the replacement property identified and transferred to the exchanger in due time.

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