1031 Exchange Process
The process of a 1031 exchange can be confusing – especially because there are different kinds of exchanges. If you’re not sure which kind of exchange (deferred, simultaneous, reverse, construction, etc.) is right for your situation, it’s probably most efficient if you just give us a call (at 1-800-USA-1031) to talk to a 1031 advisor. We’ll quickly be able to understand your situation to advise you on the best approach. Please note that we do not provide tax or legal advice.
Below we have outlined the deferred exchange: the most common type of exchange. This is where you sell (or technically ‘exchange’) your relinquished property, identify and acquire suitable replacement property.
The process for each type of exchange is different. Regardless, the most important thing to remember in regard to the process is that you must coordinate with a Qualified Intermediary (QI) before closing on the sale of your relinquished property. From there, we’ll guide you through the rest – each step of the way.
List property for sale
This process all starts when you’re selling a piece of business or investment real estate. When you list your property for sale, it’s a good time to start thinking about an exchange. What are your objectives? What will you do with the proceeds?
Determine if an exchange is right for you
Questions to ask when you’re considering an exchange: is the property my primary residence or a second/vacation home? No? Proceed. Is my sales price higher than my original purchase price? Yes? Proceed. Have taken any depreciation on the property? Yes? Proceed. If you have a taxable gain on your property, you most likely want to do a 1031 exchange.
Begin looking for replacement properties
Already? Yes, it’s a good idea to begin this process sooner than later. Once you’ve closed on the sale of your relinquished property you only have 45 days to identify replacement property. This doesn’t leave much time for searching and due diligence. Keep in mind, that if you’re looking for properties that generate a passive monthly income, we have a team with over 20 years of experience in these types of 1031 properties.
Connect with a QI
If you’re reading this, then you’ve already found a great QI. Regardless of which type of exchange will best fit your situation, be sure to connect with a QI before you close on your relinquished property. We’ll help you understand the process and will provide the necessary documents to your title company for closing. Don’t worry if you’re didn’t plan ahead and need a last-minute exchange. We can do same-day exchanges too!
Finalize the sale
Once you’ve come to agreement with your buyer, you’ll inform them, your agent, and title company that the closing will be done as a 1031 exchange. Your sales agreement will include a ‘cooperation clause’ addendum that simply discloses your intent to sell the property as part of an exchange.
Close on the sale
If you’ve coordinated with us ahead of your closing, we’ll have aligned with your title company to have the necessary documents ready for you to site at closing. Once you close on your relinquished property, funds will be held by your QI and the time starts ticking – you now have 45 days to identify replacement property and 180 days to close.
45 days
Many exchangors think of their 45-day period as the time to begin looking for replacement property. We suggest to clients that they not only identify suitable replacement property within their 45-day time limit – but also get property under contract and even close during this period. IDs is made in writing with your QI. There are often large sums of money at stake and with a limit on how many properties can be identified for an exchange, risking a failed or incomplete exchange is worth going to extra lengths to avoid.
Get replacement property under contract
When you get your replacement property under contract, inform the seller that you intend to purchase as part of an exchange. The closing process is very simple and isn’t much different from a regular real estate closing. We work with your agent and title company so everything is in place at closing.
Close on your replacement property
Your closing will be very similar to a regular real estate closing but since you’ve now completed your exchange, you have deferred payment of capital gains taxes. You can continue to do exchanges each time you sell subsequent properties and continue to defer these taxes, even indefinitely.
After the exchange
After your exchange has been completed we’ll provide you with all pertinent documentation for your records and taxes.