What are the steps involved in a 1031 exchange?

On Behalf of | Apr 17, 2020 | 1031 Exchanges |

A 1031 or like-kind exchange is quite attractive among real estate investors because it gives them a way to defer their tax obligation by using the proceeds from the sale of their original home to purchase a new one within a set amount of time.

There are certain steps that all real estate investors looking to do a 1031 exchange process must follow.

First, an owner must sell their real estate. That individual must then turn over the proceeds from that sale to a third party that is referred to as their “Qualified Intermediary”.

The owner of the original piece of real estate is given 45 days from the date of the closing of their original property to identify up to three replacement ones to purchase. The investor must then close on one of those within 180 days using the proceeds from the original home’s sale.

Why many investors who pursue a 1031 exchange do so as a way to delay having to pay capital gains taxes on a property that they sell, there are many other benefits associated with this. One is that it helps investors quickly accelerate the growth and diversity of their investment portfolios. Another is that it allows owners to divest themselves of undesirable assets quite quickly. Many individuals also pursue 1031 exchanges as a way of preserving legacy wealth. Investors can generally pass on their homes to their heirs without them having to pay any taxes on it.

An investor has to meet certain conditions if they want to have their 1031 exchange considered as a like-kind investment. First, the property must be located here in the United States. Whatever property the owner buys must either be used as an investment or for business. The replacement home must meet the Internal Revenue Services’ requirement that the dwelling is “of the same nature, character or class” as the one that the investor gave up.

The 1031 exchange process can be quite complicated. This is especially the case if you’re not keen on how to set aside the proceeds from the original home’s sale with a third party, aware of the deadlines by which you need to do certain things or the requirements that you must meet to comply with IRS requirements. An attorney can help guide you through the process of selling off and purchasing a new Florida home.