Accomplish 1031 Exchange in 8 Steps !

How to successfully Achieve 1031 Exchange ?

 

1031 Exchange rule is precribed for tax deferral of gains made on the property. Internal Revenue Code Section 1031 deals with the deferral of gains by like-kind exchange of property. So what are the steps that lets you successfully conclude the 1031 exchange? Here are those eight steps for a typical 1031 exchange:

Hire a federally-licensed enrolled agent (EA), or state-licensed tax counsel or Certified Public Accountant (CPA).

 

You must include the Cooperation Clause in the sales agreement.

“Buyer is aware that the seller’s intention is to complete a 1031 Exchange through this transaction and hereby agrees to cooperate with seller to accomplish same, at no additional cost or liability to buyer.”

Your closing agent contacts the Qualified Intermediary to order the exchange documents.

Sign agreement with the Qualified Intermediary in which it must be named as principal in the sale of the relinquished property and the subsequent purchase of the replacement property. The following point must be noted

  1. The 1031 Exchange Agreement must meet with federal tax law requirements, especially pertaining to the proceeds.
  2. Along with the basic agreement document, an amendment to escrow document is signed which names the Qualified Intermediary as a seller.
  3. The deed is prepared for recording from the taxpayer to the true buyer.

Once the relinquished escrow closes, the closing statement must reflect that the Qualified Intermediary was the seller, and the proceeds go to the Qualified Intermediary.  The closing date of the relinquished property escrow is the date when the exchange clock starts to tick. There are time limits that must be adhered to

  • 45 days for the written identification of the address of the replacement property and
  • 180 days for acquiring of the identified property by taxpayer .

 The taxpayer notifies Qualified Intermediary about the property on or before Day 45 of the exchange. The identification document must be signed by everyone who signed the exchange agreement. It may sent or mailed either to the Qualified Intermediary, the seller of the replacement property or his agent.

The taxpayer signs an agreement to buy the replacement property. This agreement must again include the Cooperation Clause. “Seller is aware that the buyer’s intention is to complete a 1031 exchange through this transaction and hereby agrees to cooperate with buyer to accomplish same, at no additional cost or liability to seller.”  An agreement is signed naming the Qualified Intermediary as a buyer.

When conditions are satisfied and escrow is prepared to close , the Qualified Intermediary transmits the exchange funds and gross proceeds to escrow. The closing statement at this point of time , reflects the Qualified Intermediary as the buyer. The Qualified Intermediary send the final accounting to the taxpayer.

Taxpayer files Form 8824 with the IRS when taxes are filed, and whatever similar document your particular state requires.

 

 

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