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. 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. To benefit from a 1031, you need to purchase like-kind property in exchange of the property you sold.
You can have a 1031 exchange for any of these types. 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. In delayed exchange, property is sold and the replacement property is bought within 180 days. Reverse exchange has the replacement property bought before the initial property is sold. When capital is used to improved the property, then we call it improvement exchange. Personal property exchange can also comes under like-kind exchanges other than real estate. 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.
In delayed exchange, the first step is planning out the whole transaction by talking to a qualified intermediary, called a facilitator. The facilitator ascertains the investment objectives of the seller or exchanger and suggests the right option after estimating the amount of potential capital gains and the resultant tax outgo involved.
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.
When the exchange is decided, certain parties are informed about it and the intent to exchange. The real estate agent, the closing agent, the accountant, and the attorney are the parties notified of the intent to exchange.
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. After closing, the exchanger will transfer the relinquished property to the QI, who would them simultaneously sell the property to the buyer. 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 QI then will purchase the property that was identified by the exchanger and transfer it to him in due time to complete the exchange.