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. You are only required to exchange properties that are like-kind and the property your gave up and the property you receive must be used for either investment or for productive use in trade or business. IN a 1031 exchange, only like-kind properties are involved.
There are five types of 1031 exchanges. The simultaneous exchange, the delayed exchange, reverse exchange, improvement exchange, and personal property exchange are the types of 1031 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. Personal property exchange can also comes under like-kind exchanges other than real estate. 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.
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. Then the facilitator converts the sales transaction into an exchange deal through specialized documentation.
When the exchange is decided, certain parties are informed about it and the intent to 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.
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. To complete the exchange, the QI will purchase the replacement property identified and transferred to the exchanger in due time.