If you own business or investment real estate, a 1031 tax deferred exchange allows you to "roll-over" all of the proceeds received from the sale into the purchase of one or more other like-kind investment properties. The IRS rules describing what is considered "like kind" are somewhat broad and include land, rental, and business property. Any can be exchanged for the other.
At closing, proceeds are transferred to a third party - known as a facilitator or qualified intermediary - who holds them until they are used to acquire the new property. A 1031 exchange is often referred to as a Starker exchange.
Exchanges allow you to delay capital gains taxes if all of the exchange funds are used to purchase like-kind investment property.
The deferment is akin to obtaining an interest-free loan on the tax dollars you would have owed for a cash sale. More equity is retained, and this, in turn, helps you move into properties of higher value each time you perform a 1031 exchange.
Success in doing 1031 property exchanges is mostly about doing exactly the right thing at exactly the right time. Consult with your tax and financial advisors about 1031 rules to determine if a 1031 tax-deferred exchange is appropriate for your circumstances and compatible with your investment goals.
Maine Licensing Requirements
Beginning in September, 2009 Maine will require that Exchange Facilitators be licensed by the state. Other requirements will include fidelity bonding, E&O coverage as well as prohibit commingling of exchange funds with the QI operating funds. Furthermore this new legislation mandates that the funds of the exchange be invested in a manner that ensures liquidity and preservation of the principal.
Some general steps to follow to achieve a successful exchange include:
Listing the Relinquished Property with a Real Estate Broker
The Exchanger will list the Relinquished Property with a real estate broker. The broker/agent, ideally skilled in 1031 Property exchange functions will disclose the intent to complete an exchange in the listing agreement.
Offer, Counter Offer and Acceptance
The Exchanger (Seller) enters into contract with the Buyer for the sale/exchange of the Relinquished Property that discloses the Seller's intent to complete an exchange, and obtain the Buyer's cooperation.
Open Escrow for the Relinquished 1031 Property
All earnest money deposits should be placed with the Escrow Company. The Facilitator prepares the property exchange agreement and the necessary amendments and assignments and coordinates with the escrow holder. The close of escrow of the Relinquished Property and the recipe to the net proceeds by the Facilitator completes Phase One of the tax-deferred exchange. Important: The exchange documents must be in place and signed by all parties prior to close of escrow.
Identify Replacement Property
The Exchanger must identify all 1031 Replacement Property with 45 days from the close of escrow of the Relinquished Property. The identification must be in writing, signed by the Exchanger, and sent to the proper parties by the end of the 45th day.
Contracting for the Replacement Property
After closing on the Relinquished Property the Exchanger has up to 180 days to acquire the Replacement Property. With the help of his or her agent the Exchanger enters into contract to purchase the Replacement Property from the Seller. In the contract to purchase, the Exchanger discloses the Exchanger's intent to complete the exchange and obtains the Seller's cooperation.
Open Escrow for the Replacement Property
The Facilitator prepares the Phase Two Exchange documents and coordinates with the Replacement Property Escrow holder. At the instruction of the Facilitator are placed in escrow and the escrow holder deeds the Replacement Property from the seller directly to the Exchanger. The transaction is closed as Phase Two of a delayed 1031 property exchange.
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