Section 1031 Exchange

A 1031 property exchange is an effective way to defer paying taxes that would otherwise have been due on the first sale.

For example - an investor bought a commercial property, a strip mall, for $200,000. After 6 years he sells the property for $250,000.

This results in a gain of $50,000 and the investor would have to pay capital gains tax on this amount. However if he invests the $250,000 in another commercial real estate (like kind - does not have to be a strip mall), then he does not have to pay any taxes now i.e he defers his taxes till a later date.

Frequently the most difficult component of a 1031 Exchange is identifying replacement property within the first 45 days following the sale of the relinquished property. The IRS is very strict in not allowing extensions. The only way to extend your 45 days is on the front end, and that is done by carefully thinking about your replacement property alternatives before you close on the sale of your relinquished property. Banks and Banking Facts

Once an investor has decided to pursue a 1031 Exchange,

the process is fairly straightforward and will be carefully facilitated by a Qualified intermediary. It is suggested that you contact a QI as soon as the exchange decision has been made. Here is a typical timeline involving an exchange, presented in the traditional order of occurrence.

• Investor decides to sell investment property and do an exchange. Investor contacts a QI.

• Investment property is put on the market.

• Offer to purchase investment property is accepted.

• Escrow for the sale is opened and preliminary title report produced.

• The QI sends required exchange documents to escrow closer for signing at property closing.

• Escrow closes.

• Within the first 45 days after the close of escrow on the sale of the relinquished property, investor identifies replacement property as required by law.

• Within 180 after the close of escrow on the sale of the relinquished property, investor closes on replacement property that was identified by them. The exchange is completed.