1031 Tax Deferred Exchange



Whether your property is owned free and clear or encumbered, the benefits of deferring the capital gain tax by way of a tax deferred exchange are significant. Most exchanges, whether they are simultaneous or delayed, involve three parties: the investor (exchanger) who is doing the exchange, the buyer who is purchasing the exchanger´s old (relinquished) property and the seller who is selling the exchanger a new (replacement) property. To create the exchange of assets and obtain the benefit of the of tax code protections, exchangers use the services of a "Qualified Intermediary." The Qualified Intermediary becomes a fourth principal party in both simultaneous and delayed exchanges. The steps for completing an exchange are relatively simple:

1. The exchanger signs a contract to sell a relinquished property to the buyer.

2. The exchanger enters into an exchange agreement with the Qualified Intermediary and the exchanger assigns the exchanger´s rights in the sale contract to the Qualified Intermediary, including the right to receive the exchange funds.

3. At the closing of the relinquished property the exchange funds are wired to the Qualified Intermediary and they instruct the settlement officer to transfer the deed directly from the exchanger to the buyer.

4. The exchanger has a maximum of 180 days in the exchange period to acquire all replacement property.

5. Unless the exchanger can acquire all replacement property within the first 45 days from the close of the relinquished property, the exchanger must identify possible replacement properties in writing to the Qualified Intermediary within the 45-day identification period.

6. The exchanger signs a contract to purchase the replacement property with the seller and the exchanger assigns the exchanger´s rights in the purchase contract to the Qualified Intermediary.

 7. At the closing of the replacement property the Qualified Intermediary wires the exchange funds to complete the exchange and instructs the settlement officer to transfer the deed directly from the seller to the exchanger.

If you have questions about the many benefits of a tax deferred exchange and how they apply to your specific situation, we recommend you contact your tax professional.