A step by Step guide to the Exchange Process
1) When you are going for a 1031 property exchange it is very important that you know as many details about the process as possible. Browse through our site and speak to your tax consultant to calculate your tax exposure and make an estimate of your Capital Gain from the transaction to see if it is a feasible exchange for you.
2) Complete your purchase and sale agreement just as you would have done with a regular sale. We suggest you insert a clause in this, which clearly states that this transaction will be a delayed exchange and there will be no lack of disclosure which may otherwise obstruct the transaction.
This can be done by incorporating a clause as follows :
“A material part of this transaction is the successful completion of an I.R.S. Code Section 1031 deferred exchange. “Buyer/Seller” agrees to cooperate with the “Exchanger” (note: insert the full name of the party doing the exchange in place of the word “Exchanger”) in signing those documents necessary to complete the exchange, provided that “Buyer/Seller” shall incur no additional costs or liabilities in excess of those which would have occurred had this been an outright “purchase/sale,” and not an exchange.”
3) When your agreement is complete and fully signed take it to your closing agent. Make sure that you tell the closing agent that this is going to be a 1031 property exchange. If you are working with a real estate agent, he will do it for you.
4) After this you need to notify us about the details of your closing agent. We will need the name, the phone number of the closing agent, the company and the file number (sometimes referred to as the escrow number). You can send us this information through the contact form.
5) We will then contact your closing agent and get any additional info that is required. We will set up and exchange file for you, process the 1031 property exchange documents and send these documents directly to the closing agent. You can sign the documents once you get it from the closing agent and provide with any other closing document.
6) After the exchange sale is complete, the closing agent will transfer the proceeds to our account. On receipt of the fund and a copy of the final closing statement we will send you a letter showing the amount of proceeds we received. (This should be same as the amount shown in the closing statement). In this letter, we will also inform you about the 45-day and 180-day period and a form will be enclosed for you to identify the replacement property.
Once you have done this much, you are into your 45 days period of your 1031 property exchange.
7) Before the end of the 45 days identification period you need to identify the properties for 1031 exchange. You can inform us about these properties through the form provided by us or through any other similar written format. This can be sent to us by mail, email or fax. For this document to have validity, it should be fully signed by each named, “Exchanger”.
8) Now you need to write and sign the purchase and sale agreements including the “Exchange Clause” and open escrow, similar to the first transaction. Inform your closing agent that this is a 1031 property exchange and we are your Qualified Intermediary. It is not necessary for the closing agent to be the same one who sold the relinquished property.
9) Once you have done this you need to inform us about the details of your closing agent and how much of the proceeds do you want to use for the purchase. We would also like to know an approximate date when you are planning to close this transaction.
10) We will then contact your closing agent and get any additional info that is required. We will send the exchange closing documents directly to the closing agent. After both the parties have signed the closing documents the closing agent will send us those documents. Upon receipt of those documents we will wire transfer the amount into escrow. This can be recorded as the close of the exchange and you have completed your exchange.
After the exchange is complete, the closing agent is supposed to give you copies of all the documents used in the transaction. When you have closed on the identified property or your 180-day period is over, your exchange ends. We will return any unused proceeds. Ideally you should try to use the entire proceed for your 1031 property exchange as any remaining balance is taxable on their full amount.
While filing your taxes you need to report the exchange through: IRS form 8824 “Like Kind Exchanges”