A tax deferred exchange is simply a method by which a property owner trades one property for another without having to pay any federal income taxes on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But in an exchange, the tax on the transaction is deferred until some time in the future.
Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code. The Requirements of Section 1031 must be carefully met, But when an exchange is done properly, the tax may be deferred.
Stages of 1031 Tax-Deferred Exchange
- Discuss with a tax advisor to determine if an exchange is practical.
- Enter into an agreement with a Qualified Intermediary (Intermediary services include selling the relinquished property*, acquiring the replacement property, and transferring the replacement property to the taxpayer).
- Complete your purchase and sale agreement as with a regular sale.
- Select a closing agent to whom the Intermediary will provide the necessary exchange documents.
- Close the sale as normal, signing the exchange documents along with the closing documents. The closing agent will then deliver the proceeds into the Intermediary's trust account.
- Within 45 days of closing, the exchanger will identify the replacement property* or properties and notify the Intermediary of such identification.
- Sign a Purchase and Sale Agreement to acquire the replacement property.
- Select a closing agent. Again, the Intermediary will provide the required exchange documents to be signed at closing.
- After closing documents are signed (must be completed within 180 days of the sale of the relinquished property) the Intermediary will deliver proceeds held for the exchanger to the closing agent to be disbursed.
- The Intermediary will create a direct deeding document which will allow the title to be directly transferred to the exchanger at the time of closing.
*The Replacement Property - The new property that the taxpayer would like to acquire in the exchange. We will facilitate your 1031 Tax Exchange. Contact us for more information.