Step One: Sell your current investment property.
It is important to state that you will be engaging in a 1031 exchange in the sales contract BEFORE closing. You must have a Qualified Intermediary receive the net proceeds at close and hold the money until you close on the new investment property. If you do end up closing on the property without doing both of these things, you will not be able to do a 1031 exchange.
Step Two: Identify the replacement property.
Section 1031 of the IRS code requires that you identify the new replacement property within 45 days following the sale of the relinquished property. As a general rule of thumb, you may identify up to three properties as potential replacement properties. However, it is possible to identify more, subject to certain restrictions. It is important to remember that the IRS had considered tenant in common property to be valid replacement property for the last few years. We recommend that you review multiple tenant in common properties if only to identify as "back up properties" if for whatever reason your top choice does not close. Not identifying multiple replacement properties is one of the most common reason an exchange blows up and you are then forced to pay taxes! It is a good idea to visit our view properties page to start your search for many types of 1031 replacement property.
Step Three: Purchase the replacement property.
You must obtain the replacement property within 180 days following the sale of the relinquished property. The Qualified Intermediary pays the closing costs and you receive the deed to the replacement property. One stipulation for deferring your taxes with an exchange is that, among other things, the replacement property must be of equal or greater value to the relinquished property. Remember that if you are using a tenants in common (TIC) property as a replacement property, make sure you are working with someone that specializes in tenant in common property. A TIC property is one with multiple owner-investors that is normally managed by a professional property management agency.
People are commonly puzzled by the entire process, especially if they're not working with a real estate broker that is experienced with property exchanges.
It is advisable to work with 1031 exchange professionals to ensure compliance with the specific regulations as defined in the IRS code. An expert can offer you a more comprehensive and strategic tax exchange, which follows due diligence. Our knowledge and experience will help you. We can guide you through the compliance process with the IRS and also maximize the profitability of your real estate exchange through selection of high quality replacement property.
With the increase in tenant in common property deals in recent years and the amount of cash driving the real estate marketplace, deferment of taxes has become an essential tool for today’s savvy real estate investor. Only a few years ago, real estate exchanges were a foreign term for many investors, but today it is commonplace in real estate transactions, and an ideal solution for deferring those bothersome capital gains taxes.