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. IN a 1031 exchange, only like-kind properties are involved.
There are five types of 1031 exchanges. The simultaneous exchange, the delayed exchange, reverse exchange, improvement exchange, and personal property exchange are the types of 1031 exchange. When a property is sold at the same time another property is bought, then this is the simultaneous exchange. In delayed exchange, property is sold and the replacement property 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 include cattle, aircraft,mineral rights, and others.
Each of the processes in these different types of exchanges vary substantially. The most common and most popular type of 1031 exchange is the delayed 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.
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 specialized documentation is prepared by the facilitator converting the sales transaction into an exchange deal.
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. Parties then review the documents. The QI will then sell the property to the buyer after the closing. Until the replacement property is bought, the proceeds of the sale is handled by the QI.
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.