A Simplified Explanation of the 1031 Exchange Process
1. Talk with a 1031 exchange broker or advisor – 1031 is not for every type of real estate investor. You should consult a broker, advisor, or lawyer for further advice.
2. Hire one of our 1031 exchange agents – It will be in your best interest to contract a 1031 exchange broker to market your property to the right potential buyers, and at a maximum selling price.
3. Choose an intermediary – Under the guidelines, you must use a qualified intermediary to facilitate the exchange transaction. An intermediary includes a bank, law firm, and select intermediary firms. Once you have found an intermediary, you will begin the process of entering the exchange agreement. This allows the intermediary to receive the funds of the sale and eventually relinquish them back to you when you purchase the like kind property. To receive a tax deferment, you cannot have direct control of the money from the sale.
4. Purchase and sale agreement is completed – This step is similar to a standard property sale, but special language stating you are intending to execute a 1031 will be used.
5. Close on the sale property – Upon closing you will be required to sign a 1031 exchange in addition to other required documents.
6. Name the like kind property – You will need to identify a like kind property within 45 days of closing the sale. Up to three properties can be identified and the market value cannot exceed 200 percent of the sale price of your sold property. You might also choose to use the 95 percent rule which requires you to purchase a property equal to at least 95 percent of the identified properties. Our 1031 exchange agents can further explain this part of the process to you.
7. Purchase, closing, and acquisition of the like kind property – Various agreements will be drawn up which are similar to the selling agreements. You will have up to 180 days to close the like kind property.
8. File form 8824 with the IRS – Once the exchange of properties is made, you will need to file an 8824 form from the IRS. This allows you to receive the tax exchange.