How do you do a 1031 Exchange
There are certain rules you need to follow down to the letter and deadlines to meet on time in order for a swap of properties to qualify as a 1031 exchange.
If you’re not careful, it could lead to a surprise on Tax Day.
There are steps to complete a 1031 exchange.
1. Choose a qualified intermediary to coordinate the exchange.
Because any money you receive from selling a property is taxable, you technically can’t receive that money when you sell your property. If you do wind up taking control of the cash at any time before the exchange is complete, it could disqualify the entire transaction and you’ll owe taxes on all of your capital gains.
We have several 1031 Exchange Facilitators that we can introduce you to and they can help set you up for a 1031 success.
2. Sell your current real estate property.
One you have a 1031 exchange facilitator in place, then you can sell your investment property. It is important to note that you only have a small window of time to identify and eventually close on a replacement property. When you sell your investment property, the 1031 clock starts ticking . . . so get moving!
3. You have 45 days to identify your replacement properties.
Next, you have to come up with a small list of possible properties you plan to buy to replace the one you just sold. You have just 45 days from the day you sell your property to identify potential replacement properties so we recommend that you do not take too long. Be aware that there are no extensions to this deadline!
Once you’ve identified the potential properties, the identification has to be made in writing and signed by you. Then you’ll need to deliver that identification to someone involved in the exchange—that could be the seller of the replacement property or your 1031 exchange facilitator.
4. You have 180 days to close on a replacement property.
Once you’ve found a property you like, you’ll use the funds from the sale of your other investment property to purchase your new property. Congratulations, you did it!!! But remember: You have just 180 days (that’s roughly six months’ time) from the day you sell your property to close on your replacement property.
5. File IRS Form 8824.
You will be required to file paperwork with the IRS. You will need to fill out IRS Form 8824 which is used to report like-kind exchanges of business or investment properties.
Since 1031 exchanges can get really complicated really quickly, working with a tax advisor who can help you get all the details right can take a lot of the stress out of the process.
Choosing a Replacement Property for a 1031 Exchange
When you do a 1031 exchange, the swap has to be between what the IRS calls “like-kind” properties. Basically, that just means that both properties—the one being sold and the one being purchased—must be used for business or investment purposes.
What kind of property (or properties) meet the IRS requirements for a 1031 exchange? Here are a few important guidelines to follow when you choose a replacement property:
Properties don’t need to be the same type.
For example, you can exchange raw land for a rental house, or an office building for an apartment complex. As long as they are being used for business or investment purposes, you’ve got the green light.
Properties can be located anywhere in the U.S.
Maybe you’re moving to Florida and you want to sell a property you own in New York so you can purchase one in the Sunshine State. That’s not a problem—in fact, you can exchange like-kind properties from anywhere in America.
An exchange can include multiple properties.
Do you want to sell one property and use the profits to buy three different properties? As long as they’re all used for business or investment purposes, there’s no problem there.
The replacement property (or properties) must be of equal or greater value than the one being sold.
If you want to defer all of your capital gains taxes, the replacement property you buy has to have a purchase price that is equal to or greater than the property you sold. If the replacement property is worth less than the one you sold, you’ll have to pay taxes on the difference.
Need help finding replacement properties? We are here to help you and we can help you find an agent in another state or city if you choose to purchase outside of our area.
What Is a 1031 Exchange Facilitator
A 1031 Exchange Facilitator will sell the property on your behalf and receive the proceeds from the sale for you. They will keep those funds in an escrow account with their financial institution until you’re ready to buy the replacement property.
Once the purchase is complete, they’ll transfer the deed over to you . . . and that’s it! If there are any proceeds left over from the exchange, the qualified intermediary will return those funds to you.
Work With Pros You Can Trust
There are lots of rules and guidelines you need to follow in order for a swap of properties to qualify as a 1031 exchange. And one misstep could unravel the whole process, leaving you with a massive tax bill. That’s why if you’re considering making a 1031 exchange, you should always work with professionals you can trust to walk you through the process.