1031 exchanges don't have to be difficult, but it is critical that you understand a few modest but important requirements set forth by the Internal Revenue Service in order for your 1031 to qualify for deferred gain treatment and be considered compliant.
The Internal Revenue Service requires that the property you sell, as well as the property you buy must be like-kind. And, like-kind means one of two things. Either property held for investment, or property held for income. And definitely not your personal residence.
The IRS requires that your exchange be completed with the assistance of a Qualified Intermediary or Facilitator. This should be a well-established firm like FYNTEX, so you know that your exchange documentation will be correct and your exchange funds will be safe between the time you buy and the time you sell.
You must complete your sale and purchase within a total of 180 days or whenever your tax return is due. The tax return qualifier means that if you start your exchange late in the year, you might have to file for an extension in order to receive your full 180 days.
Now while you have a total of 180 days to complete your exchange, the IRS requires that you identify some candidate or target Replacement Properties within the first 45 days of your exchange period. Usually this identification is made to your Qualified Intermediary by completing a form which is kept in your exchange file.
There are a few different types of tax deferred exchanges, depending upon your property and the goal of the transaction. Here are the three main Internal Revenue Code Section 1031 exchange categories.
These are the most common 1031 exchange transactions in which you have 45 days to identify the property you'd like to acquire, and 180 days to complete the sale and all of your purchases.
Sometimes Exchangers need to construct a new Replacement Property or at least improve the property they are acquiring before taking title. This is known as an Improvement Exchange.
There are times when circumstances dictate that you must buy before you sell. This is known as a Reverse Exchange. Reverses can be more complicated, but they are often an effective strategy.
There are a few specific pitfalls which experienced Exchangers always avoid, and with which you should be familiar.
Pitfall #1: Ensure that your exchange proceeds are going to be handled safely by your Qualified Intermediary during the term of your exchange. In most cases this means you should insist that your funds are held in a Qualified Escrow Account at a major bank. This is not only the safest way to have your funds deposited, it also restricts the movement of any exchange funds without the Exchanger's explicit written approval, as well as that of a Bank Officer.
Pitfall #2: In addition, start looking for Replacement Property absolutely as early as possible. The 45 day identification period moves very quickly. Especially in a hot market where there are more Buyers than Sellers.
Since the 1031 exchange industry remains largely unregulated, it is important for Exchangers to select an established and experienced Qualified Intermediary with the proper approach and appropriate processing protocols. Here are a few items every Exchanger should insist upon:
Technical and Processing Expertise
Significant Experience as a Facilitator
24/7 Exchanger Visibility
True Funds Security via a Qualified Escrow Account
Advanced data security and encrypted communications
Use this form to ask your question or call our trusted 1031 exchange Partner Fyntex at 877-345-1031.