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Guide to 1031 Property Exchange

The deference of tax liability and maximizing of profits are the main benefits of the 1031 property exchange, while helping to continue with the investment of the capital. You are only required to exchange properties that are like-kind and the property your gave up and the property you receive must be used for either investment or for productive use in trade or business. So only like-kind properties are involved in a 1031 exchange.

You can have a 1031 exchange for any of these types. The five types of 1031 exchange includes the simultaneous exchange, the delayed exchange, reverse exchange, improvement exchange, and personal property exchange. In the simultaneous exchange, one property is sold and the next is bought at exactly the same time. In delayed exchange, property is sold and the replacement property is bought within 180 days. In reverse exchange there is a reversal seen in the way the replacement property is bought first before selling the initial property. Improvement exchange uses some of the capital to improve the property. Personal property exchange can also comes under like-kind exchanges other than real estate. These exchanges can include cattle, aircraft,mineral rights, and others.

When these exchange are processed you can expect substantial differences. The delayed exchange is the most common and most popular type of 1031 property exchange.

In delayed exchange, the first step is planning out the whole transaction by talking to a qualified intermediary, called a facilitator. The facilitator first estimates the potential capital gains and tax outgo involved then suggests the right options to the seller or investor after ascertaining his investment objectives.

The facilitator then drafts the purchase and sale agreements, stating the intent of the exchanger to exchange the property and getting the cooperation of the buyer. Then the facilitator converts the sales transaction into an exchange deal through specialized documentation.

When the exchange is decided, certain parties are informed about it and the intent to exchange. The parties notified are the real estate agent, closing agent, accountant, and attorney.

The facilitator then prepares the exchange document by collecting information required. Then these documents are forwarded to the closing agent for execution during closing. Parties then review the documents. After closing, the exchanger will transfer the relinquished property to the QI, who would them simultaneously sell the property to the buyer. The QI holds the proceeds of the sale until the replacement property is bought.

In 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. To complete the exchange, the QI will purchase the replacement property identified and transferred to the exchanger in due time.

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