1031 Exchange Logistics 1031. Here’s a description of exchanging and how to complete a qualifying tax deferred exchange in the most painless way possible.
Exchange Logistics 101
Let’s give you a high-level view into the logistics of exchanging and how to complete a qualifying exchange in the most painless way possible.
First determine whether you and your property qualify to be exchanged pursuant to Internal Revenue Code 1031 and the associated regulations.
For instance, are you holding it for income or investment?
Then, prepare to sell your Relinquished Property by including some language which memorializes your intent to complete an exchange in your listing agreement as well as in any purchase and sale agreements.
Then ascertain what your capital gain is as well as your equity.
This will give you an insight into how expensive or how much of a property you need as a replacement in order to defer as much capital gain as possible.
Then secure a Qualified Intermediary or facilitator who can provide the necessary professional exchange assistance and who can ensure your funds,
after they arrive from the closing, will be deposited safely.
Remember, to avoid constructive receipt issues,
it is important to understand that you cannot touch or control those funds during the entire exchange process.
Then start looking for replacement properties well before the Relinquished Property closes.
That 45-day identification period moves very quickly.
And once you’ve located suitable replacement candidates,
identify them appropriately, usually to your facilitator,
and make sure the identification has been successfully received.
Remember, most exchanges that do fail, fail because of irregularities in identification.
So any extra care you exhibit within that effort is time well spent.
Then, line up your Replacement Property financing if any.
And before closing, contact your facilitator
so they can put together the documentation which will tie any replacement acquisition into the overall exchange.
And then last, fill out that Form 8824 and file it with your regular tax return.
You can name or identify any three properties of any value.
But your identification must be in writing
and it must be transmitted or postmarked within that 45-day period.