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The 1031 Exchange Process

The 1031 Exchange Process

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One benefit of being a real estate investor is when you have decided to sell your rental property and buy another you can do what is called a 1031 exchange. A 1031 exchange allows you to sell your property and “exchange” it for a different property of equal or greater value and avoid paying the capital gains tax during the sale.

First I would like to discuss a few different types of 1031 exchanges and the rules you need to follow.
Simultaneous Exchange is the most difficult to coordinate because you have to both sell one property and purchase the other property simultaneously. You will typically use the same escrow office to coordinate both the purchase and the sale of the properties.

Delayed Exchange is the most common type of exchange where you sell your property and then have 45 days to determine your replacement property or properties. You will then have 180 days to close on the properties to avoid paying tax.

Reverse Exchange is the opposite of the delayed exchange. This is where you purchase the exchange property first.  This can also get a little complicated and involves introducing a new entity which takes title of the new property until the exchanger is able to sell the old property since the owner cannot own both properties while doing the exchange.

There are a couple of rules to follow while doing a 1031 exchange which you need to keep in mind. The property must be “like-kind” property which means they must be similar types of property. For instance, you can’t 1031 exchange your personal residence for an apartment building. You can however exchange a single family rental you already own for a larger duplex.

In order to avoid paying the taxes completely you will need to exchange the property for another property of equal or greater value. If you do not, what is left over is called a “boot” and you will then need to pay capital gains on this amount.

Also, the 1031 exchange needs to be the same tax payer. So if you own a rental property in your personal name you cannot do an exchange into a company with a different tax ID

The Process

The process for your typical exchange is as follows: once the purchase and sale agreement has been signed you will need to open a 1031 exchange account. During the sale all the paperwork will need to be singed before closing. The 1031 exchange company will work with the escrow company and after the sale the funds are deposited into a separate account to be used in the purchase of the next property. You have 45 days to identify a new property and 180 days to close on the new property.

Once the funds are in the account the money will be released on 2 conditions. First, if no properties have been identified after 45 days on the 46th day the exchange company will release the funds. The other situation is if there was no purchase made after the 180 days has expired. Then the money will be released.

1031 exchange fees do vary and are typically a flat fee based on the sale price of the home and can range anywhere from $1,000 to $3,000 depending on the price of the rental.

If you are looking to do a 1031 exchange and need some advice, please feel free to reach out to myself or my team.

-Jason Windom

Investment Specialist

View More: http://sorellaphotos.pass.us/jasonproof

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