Real estate investors selling investment properties can benefit from tax-deferred 1031 exchanges. A 1031 exchange can be complicated, and one mistake could result in the investor losing money or finding an unsuitable replacement property.
The professionals find, select, and acquire suitable 1031 Exchange replacement properties throughout the U.S. and facilitate the exchange process. Following these eight steps will help you complete a 1031 exchange successfully.
Find out if you are eligible for a 1031 exchange.
Even though 1031 exchanges have clear benefits, you should ensure they are right for you.
Various factors should be discussed and taken into accounts, such as the type of property ownership, the potential tax liability, liquidity requirements, financial and lifestyle objectives, and debt obligations.
If you are unsure whether a 1031 Exchange suits you, the trustworthy and reliable providers offer a no-cost, informal consultation.
Develop a tax-deferred transition strategy with your 1031 exchange advisor.
There is a very rigid timeline for 1031 exchanges, so developing an achievable transition plan is essential before putting your investment property on the market. Many issues can sabotage a 1031 exchange once the property has gone under contract or sold if it doesn’t go according to plan. By evaluating all options according to how they align with your objectives, the Partial 1031 exchange calculator can determine whether any roadblocks need to clear before the sale.
To determine if a 1031 exchange makes sense for you, consult your tax advisor, estate planning attorney, and financial advisor. To plan for your 1031 Exchange, you should always speak to your CPA, Estate Planning Attorney, and Financial Advisor in advance.
Sell your existing investment property by entering into a contract.
To sell your existing investment property (called a relinquished property), you need a competent realtor/broker to represent you. We can recommend a realtor or broker; we have worked with many of them.
Open an exchange through a qualified intermediary.
The next step is selecting and establishing the Exchange with a qualified intermediary once your relinquished property is under contract. The IRS requires an intermediary to perform a valid 1031 Exchange. An intermediary (also called a facilitator or an accommodator) receives the proceeds upon sale of the relinquished property, holds them until the replacement property appears, then releases the funds to purchase the new property in the 1031 Exchange. The Exchange, therefore, cannot be invalidated if you (the Exchanger) take “constructive receipt” of the sales proceeds. Please note that you must open an Exchange with your qualified intermediary before the sale of the property is closed.
Determine which property you will use for your 1031 exchange replacement (45-Day Rule).
As a result of the 45-Day Rule, your qualified intermediary must know the replacement home within 45 days (by calendar day 45, your qualified intermediary must know the replacement property).
Complete the closing on the replacement property for your 1031 exchange (180-Day Rule).
As part of the Partial 1031 Exchange timeline, the 180-Day Rule is another critical milestone. For you to close on your replacement property, 180 days must be allowed after the end of the identification period) must be allowed for you to close on your replacement property.
Notify your tax advisor after the Exchange is complete.
For the property tax forms to complete, you should inform your tax advisor that you have made a 1031 exchange during the tax year. The relinquished property should not be taxed until the 1031 Exchange is complete.
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