What is a 10-31 exchange and how do they work?
A 1031 exchange allows parties in a real estate transaction to defer payment of tax on the gain from the sale of like or similar property. For example residential sale to residential purchase, vacant land sale to vacant land purchase, commercial property sale to commercial property purchase. To accomplish this the following steps must be taken.
A qualified intermediary must be selected to hold or escrow the funds from a sale until a like or similar property can be purchased. The intermediary can be a title company or attorney’s office that offer these services. There is a fee involved with setting up the escrow account, usually in the $500 range. Before you set up your escrow account please note that 100% of your sale proceeds must go directly in to the escrow account when your sale closes. If you have questions about the 1031 exchange process please consult an accountant or tax attorney experienced with 1031 exchanges prior to setting up the escrow and initiating the 1031 process.
It is very important to inform your realtor at the very beginning of the process of selling your property that you intend to enter in to a 1031 exchange agreement so the correct addendum can be incorporated in to the offer to purchase and clearly stated to the buyer the intent of the seller to complete a 1031 exchange.
The 1031 participant must also be aware of the following rules before moving ahead with escrow and a sale. (A) The value of replacement property must be equal or greater than the value of the property relinquished. (B) Equity in replacement property must be equal to or greater than equity in the relinquished property. (C) Debt on replacement property must be equal to or greater than debt on the relinquished property. (D) All of the net proceeds must be used to acquire the replacement property. (E) No net boot money can be received. After you have sold and closed on your property you have 45 days after settlement to notify the 1031 exchange of your potential replacement properties. This must be done in writing. After identifying your replacement selections you have 180 days to complete the purchase of the replacement property.