A 1031 tax-deferred exchange is a powerful tax deferral strategy. Taxpayers should never have to pay tax on the sale of investment property if they intend to re-invest the proceeds into similar or like-kind property.
Those selling an investment property may defer taxes on the proceeds by following and meeting the IRS code 1031 regulations. There are many pitfalls, especially due to the time line imposed by the IRS on such transactions.
(Within 45 days of property sale, one must identify in writing 3 ‘replacement properties’, and within 180 days, the exchange must be completed with one or more of those identified properties.There are a number of basic rules that must be followed). Many Buyers find that getting an appropriate property under contract in the 45 day identification period – one that will close – is difficult and stressful. Buyers must be prepared to focus time and energy with their Broker on all steps to obtain the property.
This is not a ‘swap’. The owner of a property sells one (the ‘relinquished’) property and ‘buys’ another like-kind property by trading in the proceeds. A Qualified Intermediary must be designated to hold the funds and handle the 1031 BEFORE you sell the property. You the investor do not ‘touch’ the funds or proceeds – they are handled by the Intermediary (also called an Accomodator or QI). Please contact Legacy if you have questions.
SUMMARY of the STEPS to a TAX DEFERRED EXCHANGE:
1) You enter into a contract to sell your ‘relinquished property’.
2) You make all arrangements with your Qualified Intermediary to set up the 1031 exchange details.
3) You close on the relinquished property (the Qualified Intermediary holds the funds – you do not ‘touch’ any of the funds to be exchanged).
4) Within 45 days of the closing on the relinquished property, you must identify the “Replacement Properties”.(Therein lies the most difficult part – finding good properties, tying them up and being sure that you are able to close on the property(ies) that you identify. Backups should always be included).