§1031 Exchange, Process Checklist

 

1031 Exchange Checklist

1031 Exchange Paperwork

Small or large, the overall success of a §1031 exchange is due in large part on the thoughtful and through preparation of a plan, the execution of the plan, and the timely management of contingencies that always seem to occur.  Depending on the size of the exchange, there can be several interested parties that must recognize their individual contribution to the project and a coordination of their efforts.

The list that follows is only a basic framework of sequential small steps that combined result in the desired exchange outcome.  There are a number of variations of exchanges that could be considered and appropriate legal/tax consultation should be engaged before starting through the process.

  1. REVIEW:  Seek appropriate tax/legal advice.  Each tax payer’s situation is different and each real estate transaction is also different one from the next.  Know the benefits of the different exchange types and what options that you may have to complete the deferral or possible elimination of the taxable event.
  2. CONTACT:  Before closing on the sale of the first property, known as the “relinquished property”, it is vitally important that you contact your preferred Qualified Intermediary.  A QI must be engaged before ownership has transferred to create the opportunity for a §1031 exchange.
  3. SALE CONTRACT:  It is important that the sale contract allow for ownership the relinquished property to be “assigned” to the QI prior to close of escrow.  So far as the Buyer is concerned, this will have little if any effect on their side of the transaction.  It is also customary to include within the contract, notice of the potential of a 1031 exchange and include an obligation that the Buyer agree to any 1031 exchange paperwork if required on the part of the Seller.  Notice within the sale contract also serves as disclosure to the Buyer’s lender of the exchange.
  4. EXCHANGE SET-UP:  Prior to the close of escrow, the QI will provide the closing officer with all necessary paperwork unique to the §1031 exchange.  As §1031 exchanges are relatively common, these additional documents are seamlessly made a part of the typical signing process.
  5. RELINQUISHED PROPERTY CLOSES:  It is this event that signifies the Seller has relinquished the property however the proceeds of the sale are with the QI, held for the exclusive benefit of the Seller.  This is also a very important date to mark on your schedule because it starts both the 45 day replacement property identification period as well as the 180 day replacement period(or until the tax filing deadline, including extensions, for the year of the dale of the relinquished property).  The QI will also be watching the schedule from this date forward.
  6. IDENTIFICATION PERIOD:  Starting with the closing date, the Exchanger has 45 calendar days to identify one or more replacement properties according to the provisions of the 1031 exchange rules.  It is the Exchangers responsibility to remain in compliance with the exchange property rules and requirements however, you can anticipate the QI will be proactively providing support during this period to ensure compliance.  This is also a period in the overall process when the real estate agent’s duties are fully exploited.  While the exploration of replacement properties can begin at any time, it is within this period that those properties are declared in writing to the QI to be a part of the exchange.  It is also of the utmost importance that all possible due diligence of the identified properties should be completed ASAP so that if necessary, back up properties can be considered.
  7. PROPERTY IDENTIFIED:  Prior to midnight of the 45th day, the Exchanger must notify the QI of the selected property(ies) that will be used for the exchange.  Keeping in mind that, based on the specific identification rule that is being used, not all identified properties are actual purchased.  For example, using the Three Property Rule, any one of three different properties that meet the overall exchange guidelines, can be purchased thereby eliminating the remaining two properties from consideration.  In practice, the Exchanger might however purchase two or all three properties within the exchange so long as the exchange guidelines are observed.  Alternatively, the Two Hundred Percent Rule and the Ninety Five Percent Rule that could be used for the selection purpose.
  8. PURCHASE CONTRACT:  The Exchanger enters into a Purchase Contract for one of the properties that were identified in an earlier step.  The contract should be in the name of the Exchanger but must have language recognizing the exchange and must be “assignable” with the other party’s consent.  This is an important document to ensure timely execution of tasks so as to reach conclusion prior to midnight of the 180th day.
  9. CONTACT:  Once the Purchase Contract is executed by both the Buyer and Seller, it is important to contact the QI and forward notification of the contract for the replacement property.  Again, it is the Exchanger’s responsibility to comply with all 1031 Exchange rules but expect the QI to do a quality check of the exchange paperwork
  10. EXCHANGE PAPERWORK:  In parallel with the tasks performed by the title/escrow company, the QI will be generating the specific paperwork to bring the QI back into the transaction for effect title transfer.
  11. REPLACEMENT PROPERTY CLOSES:  In compliance with the §1031 exchange guidelines, funding is authorized by the QI and the transfer of ownership reaches its nature conclusion.
  12. COMPLETION:  Assuming all of the conditions of the exchange have been satisfied, and the exchange funds are all used to acquire the replacement property, then the exchange is complete.

The information provided herein is from the perspective of the real estate transaction, ALL parties to any 1031 exchange should seek out appropriate legal and/or tax professionals to ensure proper fit to their specific situation.  It can’t be stressed enough the importance of working with a knowledgeable and experienced team.  A failed exchange can have far reaching impact involving paying large and unanticipated tax obligations.

Notice:  Peak Realty Advisors, a professional real estate brokerage affiliates with and recommends experts, each with specialties in associated areas including, qualified intermediary, legal, tax, funding, and escrow, all companies proven to serve as your resources to obtain accurate and thorough information about the entire exchange process.

§1031 Exchange, What is it
§1031 Exchange Basic Statutory Requirements
§1031 Exchange Terminology

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