1031 Exchange

The Common Man's Guide On How To Do A 1031 Exchange:

The 1031 Exchange provision of the IRS is a very potent provision that not only saves on unnecessary tax payments, but it also increases your real estate holdings. Therefore, you must know all about how to do a 1031 Exchange, if you are selling within the United States.

First, you have to identify a qualified intermediary. The qualified intermediary is also known as a facilitator or an accommodator. The IRS defines a qualified intermediary as a person who enters into a written agreement with you.

The agreement holds the facilitator liable in three ways. First, he will have to acquire and transfer your relinquished property. Relinquished property is the one you are giving up. Then he/she will have to acquire the replacement property, i.e. the property you intend to buy, finally transferring it in your name. It becomes needless to say here that the facilitator must be someone who is neutral.

The facilitator takes the proceeds from your first sale for safe keeping in a specified bank. Then within the specified time period, he/she has to spend the money completely to purchase another like-kind property.

It is always advisable here that the value of the new property remains higher than that of the previous one. Otherwise, the amount remaining becomes liable to be paid as capital gains tax.

Appropriate wordings also are a must to facilitate the provisions of the 1031 Exchange. This means that your preference to perform the exchange as per the provisions of the code must be clearly stated. Any real estate agent or your intermediary can help you get this right. Once the written contract is in place, you can send its details to your intermediary as per his request.

Time is of essence if you want to benefit from the 1031 Exchange. Within 45 days of closing the sale on your relinquished property, i.e. the one you are giving up, you must identify at least 3 replacement alternatives. Your facilitator must be informed of these alternatives as soon as possible.

The purchase of the replacement property, i.e. the new property, must also be closed within 180 days of the closing of your old property. During this time, your rights to pledge, borrow or receive, or obtain otherwise any property or money held by the intermediary, would get expressly limited by the contract you entered with him.

Throughout the process you must remain in touch with all the parties involved. Although the deferred tax exchange is not a difficult thing to accomplish, all the steps, as per the American taxation laws must be strictly adhered to. Hence, the final words of caution; before finalizing your intermediary, conduct a market search.

All these guidelines are the answers to the basic question that we started of with, i.e. how to do a 1031 Exchange. Follow these guidelines to the teeth.