A 1031 exchange timeline begins with your CPA suggesting the tax deferral strategy. You are in the process of selling and replacing real estate, whether that is land, a vacation rental or commercial property or aircraft used in business, artwork, vintage car, livestock or classic musical instrument and now need to research how to initiate and what is a 1031 exchange. What do you do? What are the timelines, what haven’t you done, is there time? As long as you have not closed and received the net equity from the sale, there is time. I promise as an Eagle Scout earned years ago when Richard M. Nixon was President.
Where to Begin
The first step is to start asking questions. What is a 1031 exchange? Who holds my money and what safeguards are in place to secure these funds? A 1031 is a section of the Internal Revenue Code and US Department of Treasury Regulations. The code allows the tax deferral of federal and state and recaptured depreciation taxes when like-kind property is acquired of equal or greater value. A tax deferral means the tax or recognized gain that is otherwise due, which can reach the high five to six figures given the asset, is postponed until the replacement asset is sold. The tax is then due at the then current federal and state capital gains tax rate. Or replace with another like-kind asset and the deferral continues until you pass the asset along to your heirs. Your beneficiaries receive a stepped up basis so they do not pay the tax until they sell.
Replacing like-kind property means real property for any other real property located within the US. Personal property must be replaced with the same type or like-class asset. Furniture for furniture, oil painting for oil painting, gold for gold, vintage car for vintage car and aircraft for aircraft, given both assets are predominantly held or used either within or outside the United States. Property held outside the US is considered like-kind with property held internationally.
Qualified Intermediary
After becoming formally educated on the Internal Revenue Code § 1031, it is time to engage a Qualified Intermediary or QI. A QI cannot be an employee, family member or agent who has provided a service within two years of the initial 1031 exchange closing, otherwise known as a disqualified person. Lawyers and CPAs cannot serve as the QI unless the only service they or their firm has been engaged in is for previous real estate closings. What to ask when vetting QIs is the subject of this free insight on Four Questions to Ask a QI, yours free by clicking on the button.
The QI should preferably be engaged one week or more prior to the closing. The QI will contact the escrow agent handling the closing to prepare the exchange documents in accordance with the regulations. The QI will also establish an escrow account to hold the net equity from the sale in a safe, liquid, non-commingle account. Once closed, the QI will typically provide a screen print of the escrow account along with identifying the 45th and 180th calendar days of the exchange. The next step is the identification of the replacement property unless the new property is closed on before the 45th calendar day.
Following the first leg closing, a second closing is scheduled once in contract for the replacement property. The QI will prepare exchange documentation depending upon whether improvements are to be made to the replacement property, such as an assignment and notice of assignment. Exchange proceeds are wired prior to the closing following the approval of the exchangor. Once the exchange is completed, the QI may or may not forward an exchange summary including settlement statements to you and your CPA to assist in the filing of Form 8824 along with your federal income tax return.
To view another article on 1031 exchange timelines, view the following:
Download a complimentary 10 Issues to Consider 1031 Exchange Checklist here.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
