A 1031 exchange or Like kind exchange is defined by section 1031 of the Internal Revenue Code. This code specifies that if an asset usually some form of real estate such as, land or a building, is sold and the proceeds of the sale are then reinvested in a like kind of an asset then no gain or loss is recognized, allowing the deferment of capital gains taxes.
Once an investor has decided to pursue a 1031 Exchange, the process is fairly straightforward and will be carefully facilitated by a Qualified intermediary (QI). 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.
This information is presented for informational purpose only. Consult a proper professional before making a decision.
- 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. 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. Many investors therefore carefully think about replacement property alternatives before closing on the sale of the relinquished property.