Many people have been entering the real estate market as investors for the first time and have been exploring the benefits of tax deferral using a 1031 Exchange. Speaking with a trusted tax advisor is key to learning the requirements, but many investors have questions about how an exchange will affect their sale and how the process actually works. Every 1031 Exchange company operates differently, but here is a sample outline of a standard delayed exchange.
Prior to Sale:
Investor decides to sell, contracts a real estate agent, receives and accepts an offer.
Add intent to do an exchange to the sales contract.
Contact the qualified intermediary and authorize them to initiate the exchange.
The intermediary will request documents from the title/closing company. These will be used to prepare the exchange agreement.
At closing the exchangor will sign the 1031 Exchange documents along with the other closing paperwork.
The sales transactions closes, funds are wired to the qualified intermediary, and the 45 and 180 deadline starts.
45/180 days:
The closing statement prepared by the closing agent will be sent to the intermediary and will indicate the exact date of sale; this will be the basis for the 45 and 180 day calculations.
From the closing date of the sales property, the exchangor has 45 days to identify potential replacement property, in writing, to the qualified intermediary.
Replacement property must be purchased no later than 180 days after the sale.
Purchase:
When the replacement property has been selected the contract for purchase should be amended to state that the purchase will be part of a 1031 Exchange.
The 1031 company will request documents from the title/closing company that they need to produce exchange documents for the purchase.
The closing agent requests funds to be wired from the exchange account.
Client signs closing and exchange documents and takes ownership of the replacement property. This completes the transaction.
When the exchangor is filing their income taxes they will complete form 8824 to file their 1031 Exchange with the IRS.
I really liked the way you pared the delayed exchange process down to the basics. Your entry was very well done.
I'd like to add that parties who own their property through other business entities (like partnerships, LLCs, corporations, etc) should consult their tax advisors PRIOR to listing the property to retain the most flexibility.
If there are several partners/members/shareholders, a number of decisions need to be made, especially if the individuals do not have the same goals. For example, several individuals may want to do and exchange and several want to cash out. The advisor will assist them in determining whether a "drop and swap" format or a "swap and drop" format is more appropriate for their situation.
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Excellent, excellent summary! Kudos!