Please take a minute to review the details below regarding 1031 Tax Exchanges.
“Buyer acknowledges it is the Seller’s intent to effect an IRC Section 1031 tax-deferred exchange which will not delay the closing or cause additional expense to Buyer. The Seller’s rights and obligations under this agreement will be assigned to Exchange Services, Inc., a Qualified Intermediary, for the purpose of completing the exchange. Buyer agrees to cooperate with the Seller and Exchange Services, Inc. in a manner necessary to complete the exchange.”
“Seller acknowledges it is the Buyer’s intent to effect an IRC Section 1031 tax-deferred exchange which will not delay the closing or cause additional expense to Seller. The Buyer’s rights and obligations under this agreement will be assigned to Exchange Services, Inc., a Qualified Intermediary, for the purpose of completing the exchange. Seller agrees to cooperate with the Buyer and Exchange Services, Inc. in a manner necessary to complete the exchange.”
1. Property must qualify for a tax-deferred exchange.
Property used in a trade or business or held for investment. Any form of investment real estate or any real estate housing or business qualifies. Your primary residence or another property that you treat as a second home for tax purposes does not qualify.
2. You must state that you are planning to do a tax-deferred exchange prior to the sale of your relinquished property.
If you are doing a Reverse exchange then you must state that you are planning to do a tax-deferred exchange prior to the purchase of your replacement property.
Your intent must be clearly stated prior to the closing of your relinquished property (for a Reverse exchange, this would be the replacement property) and be mentioned in the Purchase & Sale Agreement or an Addendum added to the Purchase Agreement and signed by both Seller and Buyer. If you are working with a Realtor your agent can incorporate this information into the Purchase & Sale Agreement. We can assist with the necessary 1031 verbiage if needed.
3. You must use a Qualified Intermediary (a.k.a. Q.I., Facilitator or Accommodator).
The IRS won’t allow you to receive cash proceeds or take “constructive receipt” of the funds at all, or else you will be taxed; therefore the Qualified Intermediary legally sells the relinquished property in order to buy the replacement property, creating an exchange of properties. The Qualified Intermediary will prepare all of the necessary documents and work with the agencies involved to structure this transaction as an exchange and not just the sale of one property and acquisition of another.
4. You must acquire “like-kind” property.
“Like-kind” property is “any form of real property used in a trade or business or held for investment.” The key word is “real” property; therefore, types of investments such as stocks, bonds, or mortgages do not qualify.
5. The same amount of debt/cash or greater must be reinvested into the relinquished property.
To be completely tax-deferred, you must purchase replacement property of equal or greater value, less closing costs and commission of your relinquished property. The cash proceeds and at least the same amount of debt that was paid off must be reinvested in the replacement property.
6. There are two specific time limits that must be met:
The first is the 45 day identification of replacement property. The exchangor must identify any replacement property within 45 days from the closing of the relinquished property. The second is the 180 day exchange period. This is the time period in which you must complete your 1031 exchange and begins with the closing date of your relinquished property.