What is involved in a 1031 Property Exchange?
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. 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. IN a 1031 exchange, only like-kind properties are involved.
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. 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. When capital is used to improved the property, then we call it improvement exchange. There can be 1031 exchanges that does not involve real estate but are also like-kind exchanges and these are called personal property exchange. 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.
In delayed exchange, the first step is planning out the whole transaction by talking to a qualified intermediary, called a facilitator. 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 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.
The facilitator then prepares the exchange document by collecting information required. The closing agent is then given these documents for execution during closing. Parties then review the documents. So when the closing is fulfilled, the property is transferred to the QI to sell to the buyer simultaneously. The proceeds go to the QI and held by him until the acquisition of the replacement property is over.
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.