A 1031 Exchange is simply a swap of “like kind” real property that is sold and bought through the 1031 Exchange process to tax defer the proceeds of a property. Certain guidelines and some fees may apply and we advise you to speak to a professional 1031 Company of your choice to determine the fees that are applicable to you.
The most common type of 1031 Exchange is used for real estate. In general, any type of U.S. real property held in title by the client for productive use in a trade or business, or for investment purposes can be exchanged for other real property if the properties are of “like-kind”, regardless of grade or quality.
WHAT IS “LIKE KIND” PROPERTY?
There is two ways to determine if your properties are “Like Kind” and will qualify for IRC §1031 tax-deferral treatment.
First, both the Relinquished and the Replacement Properties must be held in title, by the exchanger, in the same manner. These properties can be for investment purposes or for productive use in a trade or business as the definition goes.
Secondly, the Relinquished and the Replacement Properties must also be “like-kind.” The term “like-kind” refers to the nature or character of the property, ignoring differences of grade or quality. Below is a list of some examples, however for further information, or to see if your properties qualify as “like kind” properties, please consult your 1031 Exchange Specialist.
- Raw land or farmland for improved real estate
- Oil & gas royalties for a ranch
- Fee simple interest in real estate for a 30-year leasehold or a Tenant-in-Common interest in real estate
- Residential, Commercial, Industrial or Retail rental properties for any other real estate
- Rental ski condo for a three-unit apartment building
PLAN AHEAD AND BE PREPARED
A successful IRC §1031 exchange transaction requires planning, expertise and support. Your 1031 Exchange Specialist of choice can assist and guide you by explaining the various types of exchanges, discussing the options that may minimize or eliminate any negative tax impact, providing exchange documents, and safeguarding your exchange funds while completing your process. Laying the proper groundwork before entering into an exchange will avoid unnecessary obstacles and lead to a smooth transaction.
STEP 1. Contact your 1031 Exchange Specialist In advance, prior to entering into Escrow and before the closing date, or after entering into the purchase and sale agreement, advise us of your intent to do an exchange and contact a company of your choice immediately. The 1031 Company will work closely with your EscrowOne, Inc. and will prepare the appropriate Exchange Agreement, Assignments, and other documents that must be executed prior to closing of the Real Property or Relinquished Property being sold.
STEP 2. Before entering into an Offer, Contract or an Agreement, instruct your real estate agent and/or EscrowOne, Inc to include an “Exchange Cooperation Clause” in the purchase and sale agreement. It is important that all parties to the transaction are aware that a 1031 Exchange Company is a part of your transaction, as all parties must cooperate with the 1031 Company.
STEP 3. Start searching for acceptable Replacement Property immediately, to ensure that you can meet the strict time frame for the 45-day Identification Period.
You can always ask you Agent, Accountant, Tax Preparer or search the web for a qualified 1031 Exchange Company to service your needs.