Delayed 1031 Exchange
1031 Exchanges can be complicated for non-specialists to follow. With the right basic knowledge of the 1031 exchange, we believe that we can help our clients make an informed decision when it comes to the type of interaction they want. Knowing how a 1031 exchange happens is crucial to understanding the timelines, dates, and procedures. You don’t have to know all the details, just the ones that concern you as the exchanger.
1031 Exchanges are an IRS-approved method where investment or business property of the same type changes hands. While the 1031 transfer is used primarily for real estate, it has also been used for other depreciable and non-depreciable assets. The IRS requires a neutral third party known as the accommodator, qualified intermediary (QI), or facilitator to conduct the transaction. DeferTax acts as the third-party body for all of our clients’ 1031 transfers.
A delayed exchange is a common transaction that DeferTax performs for quite a lot of our clients. In a delayed exchange, the exchanger hands over a particular property (known as the “relinquished” property) before getting a property in exchange (the “replacement” property). The transfer order sees the relinquished property go to the recipient before the replacement property comes into possession of the exchanger.
The exchanger is responsible for arrangements before the initial property transfer. This responsibility includes marketing the property, finding a buyer for it, putting in place a sale and purchase agreement. When all these are accomplished, the exchanger’s obligation to sell then comes to DeferTax. On assignment, we transfer the relinquished property to the buyer and receive the buyer’s money for the property.
Within forty-five (45) days of the transfer of the relinquished property being transferred, the exchanger is responsible for nominating a property to replace the relinquished property. The exchanger then negotiates the sale with the seller and enacts a purchase and sale agreement. The exchanger then passes his or her obligation to buy over to DeferTax, which then uses the exchange proceeds to acquire the replacement property. The replacement property is then given to the exchanger, per agreement.
DeferTax has a mandate under IRC 1031 to transfer the property to the exchanger within 180 days of the relinquished property transfer date.
GUIDELINES FOR EXCHANGERS IN COMPLETING DELAYED EXCHANGES
Phase I: Relinquishment
- Contact DeferTax
- DeferTax examines the transfer and determines that it’s beneficial for you.
- You can then establish an account with DeferTax. You will be required to provide us with contact information and any other additional property information you’re aware of.
- Find a buyer or buyers for your property
- Sit down with the buyer and negotiate the terms of the sale agreement.
- Sign the agreement.
- Your sales agreement MUST contain a paragraph that states this sale is subject to a 1031 Exchange, and that the buyer agrees to work with the exchange to complete the sale. This statement is known as the 1031 Exchange Cooperation Clause.
- Contact the closing agent you’ve chosen for the transaction
- Provide information about the sale.
- Let the closer know that the sale is subject to a 1031 exchange and that DeferTax (who will be facilitating this exchange) will get in contact with them shortly.
- Contact DeferTax
- DeferTax can then gather all the necessary information that we require to facilitate the deal.
- DeferTax creates the requisite documents and sends them out to the relevant parties.
- Both the buyer and the exchanger sign the papers that DeferTax has drafted.
- The relinquished property is then transferred from the exchanger to the buyer via direct deed.
- The closing agent then forwards the proceeds into a federally insured bank account under DeferTax’s control, designated by DeferTax.
The first phase of exchange is complete at this point. In a nutshell, when you’ve gotten to this part of the process, you have transferred property to DeferTax, which has then sold it on to the buyer and put the proceeds aside to be used to acquire a replacement property.
Phase II: Acquisition
- Look through the identification packet that DeferTax has provided to you
- Once we receive the final settlement from the closing agent, we will create and forward an Identification Packet for your perusal.
- The packet contents are as follows: the name of the relinquished property, the amount received from the sale of said property, the 45-day identification deadline, and the 180-day deadline for completion of the exchange.
- Once you receive the identification packet, the attached form must be completed with your signature at the bottom as the Exchanger.
- Find the properties you’re interested in buying
- Discuss the terms of purchase with the seller.
- Sign a sales agreement. The signing of the contract may take place prior to identifying the property.
- The sales agreement MUST have a similar 1031 Exchange Cooperation Clause that states the sale is subject to a 1031 Exchange, and that the buyer agrees to cooperate with the said exchange.
- Identify which property or properties you’re buying
- This MUST be done by midnight on the 45th day of the exchange period.
- Once you’ve determined the property, fill out the forms in the Identification packet, and send it to DeferTax’s fax, email, or mailbox.
- Please note that THE IRS DOES NOT ISSUE EXTENSIONS short of a Presidential Declared Disaster.
- Contact the closing agent
- Provide the sale information to the agent.
- Inform the agent that this is subject to a 1031 exchange and that DeferTax will be contacting them shortly.
- Contact DeferTax
- Once you contact us, we can gather the rest of the information needed to complete the exchange. This bulk of data includes the property name, closing date, sales price, and a few other details that need to be added to the documents.
- DeferTax drafts the exchange documents with this new information and sends them out the requisite recipients.
- Both the Exchanger and the Seller sign documents that DeferTax has put together.
- DeferTax wires the exchange proceeds to the agent for the acquisition of the replacement property.
This process completes the second and final phase of the exchange. The transfer of the replacement property signals the completion of the 1031 deal.
DeferTax has done many delayed exchanges for our clients, ensuring that they get beneficial exchanges for their property transfers. Interested in finding out how DeferTax can help you with a delayed 1031 exchange?