The properties that are exchanged under 1031 exchange can be both a business or a real estate investment. The 1031 exchange helps the investor to defer the capital gain taxes on the sale of commercial property. The investors sell the property and reinvest the proceeds to buy a like-kind property of equal or greater value, avoiding capital gains taxes and other taxes. It’s required that the taxpayer need to identify the property within 45 days and purchase it with 180 days.
Although, 1031 Exchange is the most commonly used for real estate. There are 8 steps involved in the process of the 1031 exchange. However, a professional typically completes the steps for an investor since it is a complicated process. We will discuss the types of professionals to rely on during a 1031 like-kind exchange in the section below.
The 8 steps involved in the 1031 exchange process areas:
- The first step is to sell the investment property
- Give the capital gains to a Qualified Intermediary.
- Identification of a like-kind property within 45 days
- Send a duty letter to the qualified intermediary
- Negotiation with the seller of the 1031 Exchange property
- Agree on a sales price
- Have your intermediary wire the capital gains to the titleholder or title company
- Fill out IRS form
Now let’s understand the 1031 Exchange process by discussing an example. This will help you to have more knowledge of 1031 Exchange.
Let’s discuss a case of Sharon Whipkey
A few months ago, we met Sharon Whipkey, a middle-aged investor from Texas. Sharon had two investment properties under his name. He had rented them to the tenants under a gross lease. Though he was receiving rent on those properties every month, but they were not making any profit for them. Every another week, one of his tenants would call him and make a complaint about the poor condition of a building, and he would have to repair them. This way, he had to spend a big part of his income on the wear and tear of the properties.
Sharon was worried and was not able to decide what to do with his properties. So, he came to us and decided to sell one of his property so that he could get some relief. However, after a healthy discussion with our experts, Sharon chooses to do a 1031 exchange instead of going for a direct sale. By doing so he not only managed to replace his old property with a new, but he also get relief from property management.