There are as many reasons to seek a 1031 Tax Deferred Exchange as there are investors, but the fact is that completing such a property exchange can save you a significant amount of capital gains tax when you decide to sell your existing investment property and to acquire another one. Although you should always check with your tax advisor and attorney before you proceed, here are the basic steps to successfully exchanging a property under the 1031 guidelines.
Step 1 - Proper Listing
Once you've determined that a 1031 exchange is in your best interests, you'll want to list your current property with a real estate broker. Make certain that the listing agreement specifically specifies that you intend to use the property to complete a 1031 exchange.
Step 2 - Sales Contract
Once a buyer has been found for your property, the next step is typical of a standard real estate transaction. You'll receive an offer, which you will then accept or counter. Once both parties agree to the terms and price, you'll have an acceptance and a sale, making sure that everyone is clear about the fact that you're intending to acquire a new property under the terms of Section 1031 of the IRS code.
Step 3 - Facilitator
Next, you'll open an escrow account and begin working with a facilitator. The facilitator will prepare all the documents for a 1031 exchange and will work with the escrow company during Phase One of the process. The exchange agreement must be signed by everyone involved and all earnest money must be deposited with the title company before closing the escrow.
Step 4 - Find Replacement Property
You must then find and identify the replacement property with 45 days of closing. You'll then have 180 days to acquire and close on that property, making sure that everyone concerned knows that it's part of a 1031 exchange.
Step 5 - Close on Replacement Investment
You'll open an escrow account on the new property, and the facilitator will begin preparing all the documents required by Phase Two of the 1031 exchange process. Your earnest money and any other funds will be held in trust by the facilitator in the escrow account until the Phase Two transaction has closed.
There are other factors that can come into play during the 1031 Exchange process, so it's important that you seek the help and advice of your financial advisor and attorney to make sure you're complying with the letter of the law from start to finish. There can be significant amounts of money involved, since you're allowed to exchange your current property for several new properties, as long as their fair market value doesn't exceed 200 percent of the value of your old property.
Another thing to remember is that the properties must also be of a like-kind, meaning that they will both be held for productive use in a business or investment capacity. There are also some time constraints as to when you can claim the exchange on your income taxes, so as always, it's best to check with your various professional advisors before you begin the 1031 exchange process.
Copyright (c) 2006 Jeanette J. Fisher
After you've scoured every real estate reference material and attended seminars, you might have heard about 1031 Tax Deferred Exchange. This is a mandated privilege to defer your capital gains tax payment. But do you know this privilege enough to take advantage of it when you're planning to sell a property?
The Internal Revenue Code Section 1031 grants a right to all investors to defer payment of capital gains tax after several provisions have been met. The most important provision under this section is that all gains must go the purchase of "the same" property. You can't avail for 10310 exchange if you sold a house and purchase a car.
Another condition you need to accomplish is that you must find a suitable property to exchange for the one sold within a specified amount of time, which is 120 days from the date your property is sold. After you have identified, meaning put the possible exchange property under contract, the acquisition must also be made within a specified amount of time from the date of identification - extension is not allowed. You should also know that the exchange property could not be a house you want to buy for self-use.
The IRS also requires you to hire the service of a lawyer or a 1031 service company to act as the intermediary during the process. Without these people, you cannot be eligible for the 1031 exchange privilege. The intermediary is uncharged to handle the paper works involved in the process. They are also tasked to take the capital gains from you, purchase the exchange property on your behalf, and transfer the ownership to you.
Your papers must also state clearly that you want the sale and the purchase of the exchange property to cover the privilege under section 1031 of the tax law. Your intermediaries are tasks to ensure that your contracts clearly state your intention. This is part of their job, which by the way you are going to pay them for.
There are basically five kinds of 1031 exchanges; the simultaneous, delayed, build-to-suit, reverse, and personal property. The most common among all these exchanges is the delayed 1031 exchange. This is the kind of 1031 exchange being discussed above where in a time delay is allowed from the day of sale to the day of purchase.
The obvious benefit of 1031 exchange is that you can postpone the payment of the capital gains taxes until you do the final sale. You still have to pay the tax sometime in the future when you want to finally let go of the property for good or you can't find an exchange property in time. But in the meantime, wouldn't it be great to skip taxes when all you want is to exchange your property for a more profitable one?
But sometimes new real estate investors thought that only big investing companies can avail for this privilege when the truth is that all real estate investors - big or small - are eligible for this privilege. This privilege is mandated by law and is enforce by the IRS through section 1031 of the tax code.
Both Jeanette Joy Fisher & Jacques Coquerel are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Jeanette Joy Fisher has sinced written about articles on various topics from Real Estate, Network Marketing and Real Estate. teaches beginning real estate investors how to make money in any real estate market using interior design secrets to attract buyers or tenants. Free te. Jeanette Joy Fisher's top article generates over 135000 views. to your Favourites.
Jacques Coquerel has sinced written about articles on various topics from Property Investment, Finances and Make Money Online. About the author: Jacques Coquerel is a real estate investor in Atlanta, GA. He has transacted more than 750 properties since 1996. For get. Jacques Coquerel's top article generates over 2900 views. to your Favourites.