Steps in a Standard 1031 exchange:
Step 1. Engage the 1031 Exchange services of a federally-licensed registered agent (EA), or state-licensed tax advisor or Certified Public Accountant (CPA).
Step 2. Trade the property, including the Cooperation Clause in the sales contract. “Buyer is informed that the seller’s purpose is to complete a 1031 Exchange through this transaction and hereby accepts to assist with the seller to accomplish same, at no added cost or liability to the buyer.” Ensure that the escrow officer/closing agent communicates with the Qualified Intermediary to manage the exchange document services. QI’s provide specific set of 1031 Exchange services.
Step 3. Begin a 1031 exchange agreement with the QI, in which the Qualified Intermediary is listed as a principal in the sale of the relinquished property and the consequent purchase of the replacement property. The 1031 Exchange Agreement must satisfy federal tax law requirements, particularly concerning to the proceeds. Along with the original agreement document, an amendment to escrow document is confirmed which suggests the Qualified Intermediary as the seller.
Step 4. Once relinquished escrow closes, and the closing statement indicates that the Qualified Intermediary was the dealer, the gains go to the Qualified Intermediary (as per standard 1031 exchange services provided by QI). The profits must be stored in a separate, utterly segregated money market account to ensure safety and liquidity. The closing date for the escrow of relinquished property is considered as Day Zero of the exchange. Written identification of the location of the replacement property should be communicated within 45 days, and within 180 days the identified replacement property must be acquired.
Step 5. The taxpayer must send a legal description of the replacement property to the QI within 45 days of the exchange. The exchange document needs to have a signature from all the parties who signed the exchange agreement. It may be hand delivered, faxed or mailed to the QI, or an unrelated attorney, the seller of the replacement property or their agent, ideally by certified mail with a return receipt.
Step 6. The taxpayer enrolls into an agreement to buy replacement property, mentioning the Cooperation Clause. “Seller is informed that the buyer intends to perform a 1031 exchange through this transaction and hereby consents to cooperate with the buyer to achieve same, at no additional liability or cost to the seller.” The QI is named as a buyer; however, the deeding is from the actual seller to the taxpayer.
Step 7. When requirements are met, and escrow is ready to close and unquestionably before the 180th day, per the 1031 Exchange Agreement, the Qualified Intermediary sends the exchange funds and gross profits to escrow, and the closing statement indicates the Qualified Intermediary as the buyer. A definitive accounting is submitted by the QI to the taxpayer, recording the funds coming in from one escrow, and moving out to the other, all without constructive receipt by the taxpayer.
Step 8. At the time of taxes, the taxpayer needs to file form 8824 or similar document as per state laws.
The §1031 exchange commences on the earliest of the following:
the date recorded in the deed, or
the date buyer receives the possession,
also, stops on the earlier of the following:
180 days after it starts, or
The day the Exchanger’s tax return is due, including extensions, for the taxable year in which the relinquished property will be transferred.
The first 45 days of 1031 Exchange is referred to as an identification period. The total exchange period for a 1031 exchange is a maximum of 180 days. If the Exchanger has multiple relinquished properties, the deadlines start on the transfer date of the first property. The periods cannot be lengthened for any purpose, except for the declaration of a Presidentially declared disaster.
1031 Exchange Services
1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.
For consultation and assistance regarding 1031 exchange call – 888-993-2835 or email us at info@1031Xchange.com