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. IN a 1031 exchange, only like-kind properties are involved.
There are five types of 1031 exchanges. 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. When the replacement property is bought first before the initial property is sold then this is called the reverse exchange. Improvement exchange uses some of the capital to improve the property. There can be 1031 exchanges that does not involve real estate but are also like-kind exchanges and these are called personal property exchange. Cattle, aircraft, mineral rights, etc. are examples of personal property that can fall under personal property exchange.
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. Through specialized documentation, the sales transaction is converted into an exchange deal by the facilitator.
Parties are then notified about the transaction and the intent to exchange, having decide to perform an 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. Then these documents are forwarded to the closing agent for execution during closing. Review of the documents by the parties involved follows. So when the closing is fulfilled, the property is transferred to the QI to sell to the buyer simultaneously. 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.