1031 Tax Deferred Exchange Overview

1031 Deferred Tax Change

A 1031 tax-deferred exchange is a transaction that allows owners to preserve the full value of their investment property. A 1031 Exchange allows owners who decide to dispose of their investment properties to do so and avoid having to pay capital gains taxes by allowing them to reinvest the proceeds from their sales in “like-kind” properties.

OVERVIEW

The general rules that govern a 1031 exchange are quite simple. Any type of property (property or personal property) can be exchanged as long as the assigned property has been previously held for investment purposes. Under most circumstances, a personal residence will not qualify as a tax-deferred exchange.

1. AS KIND The replacement property must be of “similar type” to the relinquished property. “Like kind” doesn’t mean exactly the same thing. Most real estate is considered “of the same kind” as other real estate, such as exchanging a single-family rental home for a condominium, warehouse, or office building.
2. PROPERTY VALUE As a general rule, the property you acquire must have a value and equity equal to or greater than the property relinquished.
3. IDENTIFICATION PERIOD – The property to be acquired must be identified within 45 days following the closing of the assigned property. Property identification rules include:
4. Three (3) PROPERTY RULE: Up to three (3) properties may be identified, whatever their value,
5. PRAYED 200 PERCENT RULE: Any number of properties may be identified, as long as their combined fair market value is not more than twice the value of the relinquished property.
6. PRAYED 95 PERCENT RULE: Any number of properties can be identified, regardless of their combined fair market value, as long as you purchase 95% of that total value.
7. CHANGE PERIOD – The acquisition of the new property must be completed within 180 days of the transfer of the relinquished property, or before the tax return filing date of the year in which the first property was transferred, whichever occurs first. These time constraints must be strictly followed for the IRS to allow the exchange. the I.R.S. It is not grant extensions.
8. STEPS INVOLVED IN A SUCCESSFUL EXCHANGE
9. purchase contract. A contract is executed between the Buyer and the Seller for the purchase and sale of the relinquished property. The purchase contract must contain a “cooperation clause” in which the Buyer agrees to cooperate with the Seller in structuring and completing a 1031 exchange. The Seller (or Buyer) will assign its interest in the deal to a Qualified Facilitator or Intermediary ( FAC or QI).
10. open exchange. The exchange is established with the FAC or QI usually after escrow has been opened to close the sale. Then the necessary documentation must be prepared to carry out the exchange. The Exchange Agreement (between the taxpayer and the FAC or QI) defines the exchange transaction and sets forth the obligations of both the taxpayer and the FAC or QI. An Assignment of the contract for the sale of the property assigned to FAC or QI is prepared, assigning the rights as Seller to FAC or QI.
11. Closing of the relinquished property. The relinquished property closes when all conditions of sale have been met and ownership is transferred to the Buyer. Although the transfer will be directly from the Seller to the Buyer, it will represent a transfer from the Seller to the FAC or QI in exchange for receiving other goods at a later date. The proceeds of the sale are delivered directly to the FAC or QI for the replacement property. At no time is Seller to be on actual or implied receipt of cash proceeds.
12. Replacement Property ID. The time period for identifying the property (or properties) to be purchased as the replacement property begins with the closing of the relinquished property. Forty-five (45) days are allowed from the date of transfer to identify the property of acquisition.
13. Replacement Property Purchase Agreement. After identification of a suitable “like-in-type” replacement property and a decision as to which property to purchase, a purchase contract will be signed with Seller. The property must be one or more of the properties identified at the end of the 45-day identification period.
14. Acquisition Property Redemption Documentation. Then the Assignment of the replacement property purchase contract and the Release and Guarantee must be prepared to be executed by the Buyer and the Seller. Instructions should also be prepared for the settlement agent outlining the items needed to complete the exchange.
15. Close the replacement property. When closing conditions have been met, the FAC or QI must release the funds it has been holding to the settlement agent to purchase the replacement property. Seller will transfer replacement property directly to Buyer. Closing on the replacement property must occur within 180 days of the transfer of the relinquished property (or before the due date of the tax return, if earlier) for the transaction to qualify for treatment of the replacement property. Section 1031.