There are many steps involved in executing a 1031 exchange. In this article, we’ll walk you through all the steps you need to take for a successful 1031 exchange.
Send Your Information to Your QI
The first thing you need to do is provide your Qualified Intermediary (“QI”) with the key details and information about your transaction so they can draft the 1031 documents. Send your QI all of the following:
- The name of the title company closing the transaction
- A copy of the purchase agreement
- A copy of the title report
- The basic 411 on the seller conducting the exchange (sometimes an individual, sometimes a business entity, including the FEIN or SSN).
Next, the qualified intermediary will gather all of this information, and prepare your 1031 documents and the closing instructions for the title company so they know what needs to be signed at closing. Often the QI will get you to sign your 1031 documents prior to closing and the QI will instruct the title company to have the buyer of the relinquished property sign an acknowledgement stating that they were given notice that the seller is conducting a 1031 exchange. Further, the QI will instruct the title company on how to prepare the closing statement, what to do with the closing proceeds (i.e. wire them in a separate escrow account). The Title Company and QI are doing a lot behind the scenes to make sure the closing is drama free.
Once the closing occurs, you no longer own the relinquished property and your timelines for the 45 day and 180 day periods begin. Closing is day zero, and you have 45 days to designate in writing your replacement property. Once you find a replacement property you will fill out a form with your QI to identify them in writing and transmit that ID form to that QI. The QI will then sign, stamp and date that form and send it back to you for your records. Your CPA is going to want to know when you identified so they can fill out form 8824 – the worksheet you need to include with your tax return.
Next we need to enter into some purchase agreements for the replacement properties. In each purchase agreement you want to include a cooperation clause explaining that you’re doing a 1031. Once you’ve got that signed you can give that to your QI and they will prepare your 1031 replacement documents and interact with the closing company to make sure the closing goes smoothly.
You’ll typically have to sign a replacement property assignment agreement wherein you assign your rights to the QI and the QI will direct the seller to deed that property directly to you. You will also need to sign a disbursement request or wire transfer authorization to move your funds to the title company for closing. Once closing occurs you own your final replacement property and your exchange is over.
Then you have to talk to your CPA about filing the appropriate forms and report this to the IRS.
- 1031 Hotline: If you have questions about how to start a 1031 exchange, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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