How does a 1031 Exchange work?
A large percentage of my clients are investors, I work with them to help create a real estate portfolio, each step along the way is guided and analyzed from projections, to Cap Rate or Pro forma cash flow. Investment real estate can provide opportunities for investors to build wealth, increase income, and diversify an investment portfolio with Multi Family, Commercial and more. Using the tax benefits of a 1031 Exchange can help free more capital for investment in the replacement property.
Property held for productive use in a trade or business or for investment qualifies for a 1031 Exchange, a means to void immediate tax liability to the property owner. The IRS requires that an Exchangor use a neutral third party, known as an intermediary to facilitate a 1031 Tax Free Exchange. In order to qualify for a 1031 exchange, both properties must be located in the U.S.
Plan, & Preparation
A 1031 Exchange is a tax deferral strategy used by experienced real estate investors to defer tax liability on the profitable sale of an investment property. Known also as a "Like-Kind Exchange" meaning you are replacing one investment property for another. Property that is sold or transferred for gain can be subject to taxation. A properly-executed exchange offers investors the opportunity to hold onto their equity without being subject to heavy capital gains taxes.
In preparation for your exchange I will connect you to my team that consists of everybody you need to complete the transaction. From an established intermediary to a title company and all the contacts along the way for insurance to lenders and a real estate attorney.
Exchange fees for processing typically range from $600 to $850, the difference in price often reflecting a contrast in service, but can sometimes also be higher on a reverse exchange or customization of transaction to fit the clients needs.
Timeline & Transaction
A single-family residence can be exchanged for a duplex, land, combination flex space, office for an apartment building. Any combination will work. The exchanger has the flexibility to change investment strategies to fulfill their needs. The taxpayer associated with the relinquished property must be the same as the one associated with the replacement property. In addition, both properties need to be similarly titled.
From the closing date of the Relinquished (sold) Property, the Replacement (new) Property must be identified to the intermediary within 45 calendar days and the purchase of it must be completed within 180 calendar days, that is 135 days from the 45 day identification period. The market value and equity of the replacement property must be the same as, or greater than, the value of the relinquished property.
There are some alternate exchange programs such as a Reverse Exchange; the Replacement Property is purchased before the Relinquished Property is sold or an Improvement Exchange.
Exchange Closing
In order for closing costs to be paid out of exchange funds, the costs must be considered a Normal Transactional Cost. Normal Transactional Costs, or Exchange Expenses, are classified as a reduction of boot and increase in basis, whereas a Non Exchange Expense is considered taxable boot. I can provide this breakdown via email. In preparation for the new closing your intermediary creates and forwards an Identification Packet for your review after receiving the Final Settlement Statement from the Closing Agent. Both parties (Exchangor and Seller) sign exchange documents.
Your funds from the relinquished property that the intermediary was holding wired to the closing agent for the purchase of the replacement property.
Closing Occurs either at the title company or in any location with a notary which we can arrange for your convenience. Closing of the relinquished property must occur before the 180-day deadline and your 1031 Exchange is complete.
1031 Exchange | Resources
