1031 Property Exchange Procedures
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. 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. As the name implies, simultaneous exchange is selling and buying that happens 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. 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. In personal property exchange, you exchange your property with a like-kind property. These exchanges can include cattle, aircraft,mineral rights, and others.
Each of the processes in these different types of exchanges vary substantially. The delayed exchange is the most common and most popular type of 1031 property exchange.
The property owner who is interested in a 1031 exchange talks to a qualified intermediary (QI), or facilitator, in order to plan out the whole transaction. The facilitator first estimates the potential capital gains and tax outgo involved then suggests the right options to the seller or investor after ascertaining his investment objectives.
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 the facilitator converts the sales transaction into an exchange deal through specialized documentation.
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. Then these documents are forwarded to the closing agent 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. The QI holds the proceeds of the sale until the replacement property is bought.
The procedure for delayed exchange is that after the closing of the relinquished property, the exchanged has 45 days from closing to find the like-kind property that he want to purchase and he should purchase it within 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.