How to Initiate a 1031 Exchange


If you want to defer your capital gains tax, a 1031 exchange can be a way to do this while purchasing new property. There are several steps to follow if you want to initiate a 1031 exchange.

First of all, you should have real estate that qualifies for the exchange. Investment real estate or real estate that your business owns both qualify for 1031 exchanges. It’s a good idea to consult with an accountant before engaging in the process so that you are sure that you are exchanging appropriate properties.

Next, you need to find a buyer and a qualified intermediary. Don’t make the mistake of focusing on only finding a buyer. As soon as you find someone to buy, you need to have the intermediary lined up to accept the funds on your behalf or you could lose out on the benefits of the 1031 exchange. Once you have identified a buyer, draft a purchase and sale agreement. It’s important to inform the buyer that this is a 1031 exchange, and you should have your documents reviewed by an attorney to ensure that the terms of the sale are clear, as you would with any real estate transaction.

Your next step is to find a closing company that is familiar with 1031 exchanges. Following this, you should schedule a time to meet with your qualified intermediary. Hopefully, you have already done your research and selected an intermediary with integrity early on. Make sure you’re clear of the deadlines that you must follow in order to have the transaction classified as a 1031 exchange. You have 45 days to identify your replacement properties. You also have 180 days in which to close on the replacement properties.

Your final step is to close on the replacement properties. This is why consulting with your accountant and real estate lawyer, in conjunction with choose an experienced qualified intermediary, are so important. It can be easy to miss small details that could put the classification of your transaction as a 1031 exchange in jeopardy. Being clear from the outset and working with a team of professionals to benefit from a smooth transaction can have numerous benefits for you. The process is made much easier when you know what to expect and when you are guided through the process to adhere to deadlines. When done properly, a 1031 exchange can be essential for helping you defer the capital gains on your transaction.