What You Should Know About Properties This Year
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. 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. To benefit from a 1031, you need to purchase like-kind property in exchange of the property you sold.
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. 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. 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. 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 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 facilitator then drafts the purchase and sale agreements, stating the intent of the exchanger to exchange the property and getting 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 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. The documents are then reviewed by the different parties involved. 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.