A STEP BY STEP ACTION PLAN FOR 1031 EXCHANGES
1. Get a Purchase Agreement for Your Relinquished Property. Complete your purchase agreement as to your Relinquished Property just as you would with a regular sale. Show the name of the seller as yourself and add “and or assigns.” You should also add a cooperation clause to the purchase agreement stating that you intend this transfer to be part of a 1031 Tax Deferred Exchange and require the buyer to cooperate. Be sure to consult your real estate attorney.
The buyer herein acknowledges that it is the intention of the Seller to conduct an IRS Section 1031 Tax-Deferred Exchange and that the Seller’s rights under this agreement shall be assigned to Seller’s Q.I. (Qualified Intermediary) to facilitate such exchange. Buyer agrees to cooperate with the Seller and/or its assigns in a manner necessary to enable the Seller to initiate said exchange at no additional cost or liability.
2. Select a Title or Closing Company. Arrange for a title company or an attorney to close your transaction. Make sure you tell the closing agent that this transaction is going to be a 1031 exchange.
3. Select an Exchange Company. Notify your Qualified Intermediary of your pending sale and closing date. Fill out an application form to organize all of the information about what you are selling and when the closing is to occur (the form is usually provided by your Q.I.)
4. Close your
5. Post Closing. Once the closing is complete, the closing agent will wire transfer the proceeds into your exchange account. Upon receipt of these funds and a set of the exchange documents, your Q.I. will send you a letter showing the amount of proceeds received (this should be the same as the amount shown on the bottom of your closing statement). This letter will also include the dates of the 45 and 180 day periods, and a form to identify your replacement property. If you intend to exchange into a tenant in common property (TIC), let your financial advisor know your time frame. Your financial advisor will help you find that replacement property.
6. Identification and Exchange Periods Commences. You are now in the 45 day identification and 180 exchange periods. These time frames run concurrently. Note that the 180 day period can be shortened to your deadline for the filing of your federal tax return for the year in which the sale occurred.
7. Identify your Replacement Property. Before the end of the 45-day Identification period, you must fax or send your Q.I. a detailed list of the replacement property you intend to try to acquire. This should be on the form supplied to you. You must sign the identification form and clearly and unambiguously describe the Replacement Property. It is a good idea to have your letter post-marked and sent by certified mail to prove that you sent in the identification during the 45-day period. You can identify up to three replacement properties, or you may use the 200% rule with any number of properties. You identify a number of properties to be sure to close after doing your due diligence. Debt to equity issues need to be addressed at this time.
8. Get a Purchase Agreement for Your Replacement Property. Enter into a purchase agreement(s) and add a cooperation clause as you did in the first transaction. Send the replacement property purchase agreement to your Q.I.
The Seller herein acknowledges that it is the intention of the Buyer to conduct an IRS Section 1031 Tax-Deferred Exchange and that the Buyer’s rights under this agreement shall be assigned to Buyer’s Q.I. (Qualified Intermediary) for the purpose of completing such exchange. Seller agrees to cooperate with the Buyer and/or its assigns in a manner necessary to enable the Seller to initiate said exchange at no additional cost or liability.
9. Select Title or Closing Company. Again, arrange for a title company or attorney to close your transaction. Make sure you tell the closing agent that this transaction is going to be a 1031 exchange and who is acting as your Q.I. Once you have your closing company selected, notify your Q.I. of your pending closing.
10. Replacement Property Closing. Your Q.I. will contact the closing agent and obtain any additional information needed to set up the replacement closing for you. Your Q.I. will prepare the 1031 replacement documents and send two sets of these documents directly to the closing agent. At closing, you will sign the replacement property exchange documents along with your other closing documents. The closing agent should give you one set of replacement property exchange documents for you to keep for your tax records and send one set to your Q.I. together with a copy of the closing statement and deed.
11. End of Exchange. When you have closed on the last identified property, or at the end of the 180-day period, your exchange ends. Your Q.I. will return any unused proceeds to you. In order to defer all gains, you should reinvest all of your proceeds in like-kind replacement property of equal or greater value and equity. Talk with your accountant or tax advisor to make sure this is done correctly.
12. Report Exchange on Your Tax Return. When you file your tax return for the year in which the relinquished property was transferred, you will need to attach a form 8824 to report your exchange to the IRS.
13. You Should Keep Your C.P.A., Attorney and Financial Advisor Informed at all Times. It is never too early to talk with and ask questions of your trusted advisors. Top Top
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