The perquisites for doing 1031 exchange are as follows:
- You own an investment property.
- You are going to exchange it for like-kind property.
- You follow all the rules for 1031 exchange.
If you meet all of the above criteria, then the process is as follows:
- Before selling the property, you should hire the 1031 exchange expert in to know that 1031 exchange is right for you or not and your investment objectives.
- After that you should understand your tax basis, outstanding loan balance, projected sales price and closing costs for your relinquished property, closing date, as well as your federal and state capital gain taxes, this helps you to determine your potential taxability as well as the constraints to your exchange.
- The Qualified Intermediary plays an essential role in the execution of properly structured 1031 exchange as the intermediary is required for a valid exchange by the IRS. You should choose a reputable and experienced team for your transaction.
- This one is key – after closing on your relinquished property, funds should be kept into an exchange account established by your qualified intermediary. You are not allowed to access to the funds as part of a valid exchange.
- After the closing of the relinquished property, there are 45 days to identify the replacement properties. There are few rules which you can use for the identification, but the most common is the three property rule under which you are allowed to identify three properties so that you acquire at least one of them because IRS is very strict for the deadline, and does not provide any extended period.
After closing the previous property, you have 180 days to settle with the replacement property. The 45 days identification period and 180 days exchange period both run simultaneously, i.e. within 180 days you have to identify and exchange the relinquished property.
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