A 1031 tax-deferred exchange
is a powerful tax deferral strategy. Taxpayers
should never have to pay income tax on the sale
of investment property if they intend to re-invest the proceeds
into similar or like-kind property.
Those selling an
investment property may
defer taxes on the proceeds by following and meeting
the IRS code 1031 regulations. There are many
pitfalls, especially due to the time line imposed
by the IRS on such transactions. (Within
45 days, one must identify in writing 3 'replacement
properties', and within 180 days, the exchange
must be completed. There are a number of basic
rules that must be followed). Many
Buyers find that getting an appropriate property
under contract in the 45 day identification period
- one that will close - is difficult and stressful.
Buyers must be prepared to focus time and energy
with their Broker on all steps to obtain the property.
This
is not a 'swap'. The owner of a property sells
one (the 'relinquished') property and 'buys' another
like-kind property by trading in the proceeds.
A Qualified Intermediary must be designated to
hold the funds and handle the 1031 BEFORE YOU
SELL THE PROPERTY. You the
investor do not 'touch' the funds or proceeds -
they are handled by the Intermediary (also called
an Accomodator or QI). Please contact Legacy
if you have questions.
One solution for a
1031 Exchange is to consider investing in a Tenant-in-Common
or Fractional Interest purchase.
One can 'slide' into a property with financing
already arranged and all due diligence handled
within the short time frames. There are Pros and
Cons - please contact Legacy to discuss.
SUMMARY of
the STEPS to a TAX DEFERRED EXCHANGE:
1)
You enter into a contract to sell your
'relinquished property'.
2) You make all arrangements with your
Qualified Intermediary to set up the 1031 exchange
details.
3) You close on the relinquished property
(the Qualified Intermediary holds the funds - you
do not 'touch' any of the funds to be exchanged).
4) Within 45 days of the closing on the
relinquished property, you must identify the
"Replacement Properties". (Therein lies
the most difficult part - finding good properties,
tying them up and being sure that you are able to
close on the property(ies) that you identify.
Backups should always be included).
5) Within 180 days of the closing on the
relinquished property, you must close on the
Replacement Property(ies) using net exchange
proceeds. Most TIC properties close within a
month (or less) and most NNN properties close in
about 4 to 6 weeks, depending on financing.
Member, Federation of Exchange Accommodators
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