As a Qualified Intermediary (QI) of 1031 exchanges since 2003, accommodating simple and complex, real and personal property exchanges each 1031 exchange requires a fundamental awareness for the rules and regulations and particularly the exceptions. Inquiries either email or office calls, are received daily asking questions regarding an exchange under consideration or for a 1031 exchange already underway either by Atlas 1031 Exchange or another QI. Those considering a 1031 exchange will ask a number of questions regarding procedures for both a forward and reverse exchange.
1031 Exchange Warm Up
Often the caller has not done a 1031 exchange and asks how they work. I ask for a description of the transaction, how long the property has been held, who is the titleholder, what is the sales price, are they in contract with a scheduled closing, do they have a replacement property in mind and are repairs or improvements needed. Is the buyer or replacement property seller a related party? Depending upon the response, the 1031 exchange puzzle begins to take shape.
The first step in a 1031 exchange is to visit with your CPA to determine the tax consequences of the sale. Without understanding the recognized gain or tax due, you may be spinning your wheels to later discover a 1031 exchange is not needed. What is your intent? Is replacing the old property with a new property really what you want? What if the intent is to replace with a property less than the net relinquished sales price in what is referred to as a partial 1031 exchange?
Next, after discussing your transaction, the steps of your exchange and receiving a proposal to accommodate the 1031 exchange from a QI, engage them to facilitate your 1031 exchange. Download the following free one page document to understand what experienced Exchangors ask a prospective QI.
1031 Exchange Procedure
Once the QI is engaged, the escrow, title company or closing attorney’s contact information will be requested. The QI will ask the title company for information needed to prepare settlement statement instructions and exchange agreements for the first of two closings. There may be more than two closings depending on the number of relinquished or replacement properties. The net sale proceeds will be wired to an escrow account or if the subsequent closing is within a couple days of the closing, instructions will be provided to wire the proceeds to the replacement property closing without first being held in the escrow account.
Assignment language must be included in the replacement Purchase and Sale Agreements (PSA), while including in the relinquished PSA is a “nice to have.” Many state Realtor Association PSAs have the required 1031 exchange language already embedded. If not, include the suggested language found on the following page as an addendum.
1031 Exchange Follow Up
Once the 1031 exchange is underway and the exchange proceeds are received, a screen print of the deposit is emailed to the Exchangor along with the identification of the 45th and 180th calendar day and the exchange value target (net equity plus debt retired at closing) to defer one hundred percent of the realized gain. Monthly statements are typically mailed directly to the Exchangor from the bank.
Keeping track of each exchange milestone is important to ensure the replacement property identification is properly identified and received no later than the 45th calendar day post-closing. Once the replacement property is acquired and the exchange is completed, a summary file of primary exchange agreements and settlement statements is emailed to the Exchangor to assist in the preparation of IRS Form 8824, which is used when reporting the 1031 exchange to be filed in the year the exchange ended along with the Exchangor’s federal tax return.
If you have a 1031 related question, click on the button below for a response the Certified Exchange Specialist® on staff at Atlas 1031 Exchange, LLC.
