1031 Exchange Breakdown

The Basics of a 1031 Exchange

What is a 1031 Exchange?

A 1031 exchange allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds in a similar property of equal or greater value.

Who is eligible to do a 1031 Exchange?

Any owner of investment or business property including: Individuals, Corporations, Partnerships (General or Limited), LLCs, and Trusts.

What property is eligible for a 1031 Exchange?

Must be “like kind” property that is used for trade, business, or investment purposes. The IRS Definition is, “Like-kind” property is property of the same nature, character or class. Quality or grade does not matter. In addition, Inventory, Stock, Bonds, Debt, Partnership Interests, Certificates of Trust, and Personal Property are NOT eligible.

What time limits are on 1031 Exchanges?

The time limits on all exchanges are 45 days from the date of sale to identify a replacement property (fill out form given by 1031 exchange company to notify them of replacement property address). You also have 180 days from the date of sale to complete the exchange. There are no extensions and it does not matter if the deadline falls on a weekend or federal holiday.

Who can act as your exchange agent?

Only an independent exchange agent or qualified intermediary can act as an exchange agent. This does not include your realtor, attorney, banker, accountant, or seller.

Types Of 1031 Exchanges

There are 3 basic kinds of exchanges; Deferred, Reverse, & Improvement. All of these exchanges require an exchange agent to complete the process and differ mostly in the order of the process.

Deferred Exchange

You start with SELLING property 1 on day 1. You then BUY property 2 before day 180.

reverse excahnge

You start with BUYING property 1 on day 1. You then SELL property 2 before day 180.

improvement exchange

This type is combined with one of the 2 other types of exchanges. In an improvement exchange in addition to purchasing the replacement property, you are also making repairs, upgrades, or improvement to it.

Cooperation Clauses

When Selling:

The Buyer acknowledges that it is the intention of the Seller to effect an IRS Section 1031 Tax-Deferred Exchange and that the Seller’s rights under this agreement shall be assigned to Brazos 1031 Exchange Company, LLC, to facilitate such exchange. Buyer agrees to cooperate with the Seller and/or its assigns in a manner necessary to enable the Seller to initiate said exchange at no additional cost or liability.

When buying:

The Seller acknowledges that it is the intention of the Buyer to complete an IRS Section 1031 Tax-Deferred Exchange and that the Buyer’s rights under this agreement shall be assigned to Brazos 1031 Exchange Company, LLC, for the purpose of completing such exchange. Seller agrees to cooperate with the Buyer and/or its assigns in a manner necessary to complete said exchange at no additional cost or liability.

Steps Of a 1031 Exchange

1. Owner and buyer sign sales contract for property with a cooperation clause
2. Owner and/or Realtor reaches out to Exchange Company before closing
3. Owner signs Exchange Company’s exchange documents at the title company during closing on the property being sold (“Relinquished Property”)
4. Sale proceeds are wired to Exchange Company’s client trust account
5. Owner identifies new investment property (“Replacement Property”) within 45 days of closing
6. Brazos 1031 Exchange Company closes on replacement property within 180 days of original sale
7. Property is directly deeded to owner and the exchange is complete
8. Owner reports the transaction on his tax return in the year in which the Relinquished Property was sold
9. Owner and buyer sign sales contract for property with a cooperation clause
10. Owner and/or Realtor reaches out to Exchange Company before closing
11. Owner signs Exchange Company’s exchange documents at the title company during closing on the property being sold (“Relinquished Property”)
12. Sale proceeds are wired to Exchange Company’s client trust account
13. Owner identifies new investment property (“Replacement Property”) within 45 days of closing
14. Brazos 1031 Exchange Company closes on replacement property within 180 days of original sale
15. Property is directly deeded to Owner and the exchange is complete
16. Owner reports the transaction on his tax return in the year in which the Relinquished Property was sold

Our team is ready to walk you through the exchange process and connect you with the needed exchange agents. Contact us today at https://www.cedarframe.com/contact to get started!