Tools and Investment

When you are entering a 1031 exchange, remember to note some of these details:

Choose a good QI

Before you put the property under contract, find someone to act as a qualified intermediary (QI). It is advisable to compare costs and services of several qualified intermediaries before selecting one to handle the exchange.

The QI is the person or entity, which is a neutral party, that takes possession of the proceeds from the sale of your property, uses the funds to purchase the new property, and then transfers title of the property to you. Make sure you choose a trustworthy and experienced one since the work they do for you is essential to the success of the exchange.

The Wording is Important

Your contract to sell or purchase property must contain wordings that show an intent to perform a 1031 exchange. Your QI or real estate attorney can help you with the wording. Once you have a Q.I., you or your real estate agent should send the intermediary a copy of the sales contract and any other information they might require.

Identify the Replacement Property

If you haven’t already done so, identify replacement property. You have 45 days from closing on the relinquished property to identify up to three replacements. Your list must be sent to the intermediary in writing as well.

Closing dates are Critical As Well

The IRS usually offers no flexibility on time periods. Aside from the identification of the replacement property, the closing dates are very important too. The closing date for the new property (replacement property) must take place within 180 days of the closing on the relinquished property.

Keep in Touch with All Parties

You or your agent should remain in contact with the intermediary all throughout the 1031 process, keeping them advised regarding closing dates, etc. They will be responsible for most of the paperwork associated with the exchange, and may have specific lead-time or other requirements for each step of the process.

Doing Partial Exchanges

If you have plans to use only part of your proceeds for a 1031 exchange, consult with the intermediary to make sure your sales contract is worded correctly. You might also want to talk with an accountant to find out how the cash sale will impact your taxes.

Inquire as many questions to your QI as necessary to make you feel comfortable with the process. A tax deferred exchange is not difficult to do, but there are specific steps you must follow to make sure every aspect of the sale and purchase complies with the federal tax laws.