What is a 1031 exchange? A 1031 tax-deferred property exchange is an exchange in which capital gains tax deferral is available to real estate owners who sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in another real estate. Real Estate held for these purposes is called like-kind/1031 properties.
Property owners may sell like-kind properties and defer taxes on the sale’s profits by meeting the requirements of Internal Revenue Code (IRC) 1031 exchange. The purpose of the 1031 Exchange is to allow sellers of like-kind property to buy replacement property of like-kind within a specific time period and defer taxes.
I have provided a simplified checklist to help walk you through the basic exchange process.
- Consult with a 1031 Exchange facilitator regarding your specific property and situation.
- Sell your relinquished property. Remember to notify your buyers in the contract or an amendment to the contract of your intent to complete a 1031 exchange (with buyer’s cooperation and at no additional cost to the buyers).
- Open your exchange as soon as you have your property under contract submit the information to your 1031 facilitator.
- Sign your exchange documents assigning the facilitator of choice and fax back to your closing company.
- Close on the sale of your relinquished property. The exchange proceeds are wired to your1031 facilitator to be safely held in a trust account.
- Countdown begins. Your exchange period begins when you close on your relinquished property. You have 180 days to complete your exchange (or until the date your tax return is due, whichever is earlier).
- Identify your replacement property.
- Purchase your replacement property. Remember to notify the sellers in the contract that you are completing your 1031 exchange (with seller’s cooperation and at no additional cost to the sellers).
- Notify your 1031 exchange facilitator when you are under contract for your replacement property.
- Sign your exchange ocuments.
- Close on the purchase of your replacement property. Your 1031 Exchange facilitator will wire your exchange proceeds to the closing officer.