The 1031 Steps
- PRELIMINARY -
YOU own
PROPERTY-1,
and,
YOU want to replace it with
PROPERTY-2.
In
CONTRACT-1,
YOU agree to sell
PROPERTY-1
to
BUYER for
SALE PRICE-1.
In
CONTRACT-2,
YOU agree to buy
PROPERTY-2
from
SELLER for
PURCHASE PRICE-2.
- START THE EXCHANGE -
YOU engage a QUALIFIED INTERMEDIARY (a QI)
to prepare an
EXCHANGE AGREEMENT
In which
YOU assign both
CONTRACT-1 &
CONTRACT-2,
Agree to timely IDENTIFY (ID) PROPERTY-2,
then YOU Exchange PROPERTY-1 for PROPERTY-2 with the QI.
and the QI sets up your EXCHANGE ACCOUNT…next
- QI SELLS RELINQUISHED PROPERTY -
The
QI sells
PROPERTY-1 to
BUYER,
and your Encumbrances are Paid Off
.
The Net Sale Proceeds, if any,
are deposited into your EXCHANGE ACCOUNT with the QI
and the Deed of Title goes directly into the name of BUYER.
YOU may NOT touch a penny of the proceeds of that sale!
NOTE:
If the Closing Attorney makes the check for the proceeds payable to YOU
and YOU simply endorse it over to the QI,
the Transactions "May NOT Qualify for Non-Recognition by the IRS"
(i.e., You will have to Pay Taxes on the Gains).
- QI BUYS REPLACEMENT PROPERTY -
Within
45 DAYS of the Sale of
PROPERTY-1,
YOU must
ID REPLACEMENT PROPERTY if
NOT done already.
After your
ID of
PROPERTY-2 and
your
Written Authorization
for the
QI to disburse funds
from your
EXCHANGE ACCOUNT,
The
QI Buys
PROPERTY-2 from
SELLER,
with Funds from your
EXCHANGE ACCOUNT
(plus any Additional Funds provided by
YOU or your lender)
and the Deed of Title goes Directly to
YOU in your Name.
The QI does not appear in chain of title of either property.
- COMPLETE THE EXCHANGE -
If the purchase of ALL Replacement Property
does NOT occur Within the EARLIER OF 180 DAYS of that Original Sale of PROPERTY-1
or the deadline for filing your tax return as it may be extended
(or if, YOU did NOT Identify PROPERTY-2 within 45 DAYS thereafter)
the Gains from the Transactions "Will NOT Qualify for Non-Recognition by the IRS"
(i.e., YOU will HAVE to Pay Taxes on the Gains).
The acquisition of the Replacement Property by QI completes its conveyance to YOU in the exchange,
The QI with your Written Authorization,
then Disburses the Balance of Funds in your EXCHANGE ACCOUNT, if any,
Provides a Full Accounting & Copies of the Transactions to YOU.
YOU then File FORM 8824 to notify the IRS
that your Old Tax Basis on PROPERTY-1 is Transferred to PROPERTY-2.