Practical and Helpful Tips: Properties

1031 Property Exchange Procedures

The 1031 Property Exchange offer wonderful opportunities to defer tax liability and maximize profits while helping to continue with the investment of the capital. The main requirements for the exchange is that it is a like-kind exchange where the property you give up and the property you receive must be held by you for 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. In reverse exchange there is a reversal seen in the way the replacement property is bought first before selling the initial property. When capital is used to improved the property, then we call it improvement exchange. In personal property exchange, you exchange your property with a like-kind property. These exchanges can be done with cattle, aircraft, mineral rights, etc, but with like-kind property.

There are substantial variations in the processes of these different types of exchanges. 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. 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 real estate agent, the closing agent, the accountant, and the attorney are the parties notified of the intent to exchange.

Exchange documents are then prepared by the facilitator by collecting required information. During closing, the closing agent executes the documents forwarded to him by the facilitator. Parties then review the documents. The QI will then sell the property to the buyer after the closing. 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.

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