Guide to 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. So only like-kind properties are involved in a 1031 exchange.
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. When a property is sold at the same time another property is bought, then this is the simultaneous exchange. If the property is sold and the replacement is bought within 180days, it is called delayed exchange. Reverse exchange has the replacement property bought before the initial property is sold. There is some use of capital to improve the property in 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 include cattle, aircraft,mineral rights, and others.
Each of the processes in these different types of exchanges vary substantially. Among the different types of property exchanges, the most common and popular types 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. What the facilitator does is to ascertain the objective of the property seller or exchanger and makes suggestions as to the right options once he has estimated the amount of potential capital gains and the tax deferred.
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.
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.
By collecting the information required, the facilitator is able to prepare the exchange documents. The closing agent is then given these documents for execution during closing. 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. The proceeds go to the QI and held by him until the acquisition of the replacement property is over.
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.