| Property Exchanges conforming to IRC
section 1031 offer wonderful opportunities to defer tax
liability and maximize profits while helping to continue
with the investment of the capital. The IRC clearly states
the main qualifying parameter of the exchange as a like-kind
exchange. “In a like-kind exchange, the property you give up
and the property you receive must be held by you for
investment or for productive use in trade or business.”
Thus, 1031 Exchanges can involve only like-kind of
properties.
In all, there are five types of 1031 Exchanges. In
Simultaneous Exchange one property is sold and the next is
bought exactly the same time.
In Delayed Exchange, property is sold and the replacement
property is bought within 180 days. Reverse Exchange has the
replacement property bought before the initial property is
sold.
Improvement Exchange uses some of the capital to improve
the property, as in building a road. Personal Property
Exchange can also come under ‘like-kind’ exchanges other
than real estate. That includes cattle, aircraft, mineral
rights, etc.
Just as there are several types of 1031 Exchanges, the
processes in each of them vary substantially. Delayed
Exchange is the most common type, and also the most popular.
In Delayed Exchange, the first step is planning out the
whole transaction by talking to a qualified intermediary,
otherwise called a facilitator. The facilitator then
ascertains the investment objectives of the seller or
exchanger and suggests the right option after estimating the
amount of potential capital gains and the resultant tax
outgo involved.
Drafting a standard purchase and sale agreement is the
second step, stating the exchanger's intent to exchange the
property and obtaining the buyer’s consent to cooperate. The
facilitator then suitably converts the sale transaction into
an exchange deal through specialized documentation.
Having decided to perform an exchange, parties are then
notified about the transaction and the intent to exchange.
The parties involved are the real estate agent, closing
agent, accountant and attorney.
The facilitator then collects the information required to
prepare the exchange documents. The originals are then
forwarded to the closing agent for execution during closing.
All parties get the documents for review. After closing, the
exchanger will transfer the relinquished property to the QI,
who would then simultaneously sell the property to the
buyer. The proceeds go to the QI and held by him until the
acquisition of the replacement property is over.
In the Delayed Exchange, from the date of closing the
relinquished property the exchanger gets 45 days to identify
the replacement property and 180 days to complete the
exchange. The identified replacement property is purchased
by the QI and transferred to the exchanger in the stipulated
time, making the exchange complete.
It is the facilitator, or QI, who answers all questions
from the exchanger’s accountant or attorney. The exchanger's
funds are deposited in separate and insured accounts to
ensure security, sometimes in a $1,000,000 fidelity bond
account.
The exchange has to be done diligently so that it
survives the audit and scrutiny of the IRS.
1031 Exchange provides detailed information about 1031
exchange, 1031 exchange companies, 1031 exchange experts,
1031 exchange forms and more. 1031 Exchange is the sister
site of
Greater Orlando Real Estate.
Article Source:
http://EzineArticles.com/?expert=Josh_Riverside |
