Part 2 - 1031 Exchanges
When planning to complete a 1031 exchange you want to make sure you are following the rules and adhering to all deadlines. If done incorrectly it could mean a huge tax bill coming your way.
1031 Exchange Process
Identify the property you wish to exchange using a 1031 Exchange
Hire an experienced Qualified Intermediary or “QI” prior to listing your property for sale. This person or company will help facilitate the transaction and assure the 1031 exchange is completed correctly. A QI cannot be your relative, a real estate agent, anyone related to your real estate agent, or have a major conflict of interest in the transaction. You cannot handle a 1031 exchange on your own, an exchange facilitator is a requirement of the IRS for 1031 Exchanges.
Work with your real estate agent to list the property. Make sure your agent is aware of your intentions to 1031 exchange the property and that they are knowledgeable about the process.
A relinquished property addendum should be added to any offer received on your property. This makes your intentions of using this property as a 1031 exchange clear to the buyers and their agent and allows you to assign the contract to your QI.
As soon as you have an agreed upon sales contract with a buyer get a copy of that contract to your QI.
Upon settling the sale of your original property you have 45 calendar days to identify replacement properties in writing and submit that to your QI. More information on this can be found on my blog Part 3 - 1031 Exchange Rules
Now it is time for you to decide which property or properties from your replacement property list you would like to buy. Work with your real estate agent to negotiate a purchase contract(s) on these properties.
Once you have an executed contract(s) submit copies of these to your QI as soon as possible.
Your QI will now work with you to sign assignment contracts for the property or properties you plan to purchase.
Close on the replacement property/properties. This MUST be completed within 180 calendar days of the sale of your original property.
File your taxes including IRS reporting form 8824 which reports the details of the 1031 exchange. It is important to note that this form must be submitted with your taxes for the year you sold your original property, regardless of the date you closed on your replacement property. Consult your tax advisor or attorney prior to filing this form.
This is Part 2 of a 5 part series addressing 1031 exchanges. Please visit my other blogs for more information on 1031 Exchanges:
Part 1 - What is a 1031 Exchange?
Part 3 - 1031 Exchange Rules
Part 4 - Types of 1031 Exchanges
Part 5 - Advantages of 1031 Exchanges
If you are considering selling an investment property I highly recommend you speak to your financial advisor about the possible benefits a 1031 exchange could have for you. It’s also important to note that I am a real estate agent and not an accountant, a QI, or an attorney. Please seek legal and financial advice from those who are qualified.
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