1031 Exchange
Basic Timelines
The more common exchange is a delayed exchange. The delayed exchange is when you sell the relinquished property first and later close on replacement property. This allows you to properly market, or retail, the relinquished property and allows you time to pick a replacement property. The general guidelines in a delayed exchange are to identify property within 45 days from the closing of the relinquished property, and to close on the replacement property within 180 days from the closing of the relinquished property.
You can identify up to three properties. You can close on one, two or all three so long as the other guidelines are met. The notification of the identified property is sent to your intermediary as per their guidelines and the 1031 tax code requirements.
A 1031 Exchange allows you to defer taxes on the sale of real estate held for investment or business purposes, if you reinvest in like-kind property within certain time frames and guidelines.
Basic Exchange Guideline and Definitions
Like-kind
refers to the types of properties you can exchange. You can exchange from
property held for investment into other property held for investment.
Property held for business use can be exchanged into other property held
for business use. For example; you can
exchange from apartments, to single tenant net leased properties. You cannot exchange a property that was held for investment, for a
property to be used for personal use. You can exchange from land which was held for investment to income
property held for investment. You cannot exchange investment property for land to develop and sell
as lots. That is referred to as dealer activity and is normally
taxed.
The intermediary is the third party who temporarily holds the funds and property. The 1031 starker exchange process involves the participation of an intermediary third party who acts as a middle man who affects the 3 way trade or exchange of properties and funds. You cannot receive or hold the cash from the sale of the relinquished property. The intermediary must hold the funds until you close on the replacement property. The costs are minimal, as low as $500 for a simple transaction.
The firm holds the funds and provides the paperwork to properly facilitate
the exchange. There are several safe intermediary firms around the country
and some not so safe. If the intermediary handles your transaction
improperly, or handles other transactions improperly, your transaction
could possibly have some unpleasant tax consequences. For example as an
improper practice, your intermediary cannot also act as your broker.
The relinquished property is the property or properties you are selling.
The replacement property is the property or properties you are acquiring.
