A 1031 exchange can yield many benefits for investors. If you have little to no knowledge about 1031 exchanges, much less how the process works, this guide is for you. But before we discuss the steps in a 1031 exchange, let’s define what a 1031 exchange is.
What is a 1031 exchange?
Under Section 1031 of the Internal Revenue Code of the United States, a taxpayer may have no tax or a minimal amount of taxes upon the swap of one property for another. As a result, your real estate investment can progress tax-deferred, helping you get more profit and make more investments in the long run.
The process of a 1031 exchange
In general, this is how a 1031 exchange goes. Note that one exchange may not go the same as another, so treat this guide as a typical outline.
1. Check qualifications and requirements
A real estate property that is used for business or investment, such as TIC properties for 1031 Exchange or commercial properties, qualifies for a 1031 exchange. Check if your property meets the qualifications, and then find out what the requirements are. It also helps to consult with an accountant to see if doing a 1031 exchange is worth it or if selling the property is much easier.
2. Put your property up for sale
The next step is to list your property for sale, which you can do with the help of an agent. A 1031 exchange listing is the same as a regular one, except that you have to express your goal to do a 1031 exchange.
3. Look for another property
In general, you have 45 days to look for a replacement property after your old one is sold. Thus, it is recommended that you start looking for properties even before you get a buyer for the other one. Enlist the help of a 1031 agent to help you find the best deal.
4. Find a qualified intermediary
A 1031 exchange can’t be done DIY–you need a qualified intermediary if you want a successful deal. Look for a reliable intermediary that will serve as your middle person throughout the exchange.
5. Strike a deal
If you have a buyer for your old property who is willing to comply with a 1031 exchange, you can start negotiating with the help of your intermediary. In any case, the paperwork must state that the sale is being done under a 1031 exchange, and the buyer needs to sign the necessary paperwork.
6. Choose a replacement property
After the deal is closed, you can sign a contract for your next choice of property. The seller will also need to know you are doing a 1031 exchange, and you must have an escrow account opened.
7. Close the deal
Let your intermediary work with the title company to wrap everything up. After this, you can now close the deal on the replacement property and enjoy deferred taxes.
The 1031 exchange might sound easier than it is, but making sure you do your research will make everything run smoothly. A 1031 exchange can help you achieve more as an investor. And the best part is that you can always repeat the process.