The forward 1031 exchange is one of many types of 1031 tax deferred exchanges. In a forward 1031 exchange, the relinquished or old property is sold by assigning the rights of the Purchase and Sale Agreement (PSA) to the qualified intermediary who instructs the title company to direct deed the property to the buyer. A Notice of Assignment is signed by the buyer. An Exchange Agreement is signed by the Exchangor. The net equity is then wired to either the replacement property closing, if scheduled to closed within a couple of days, or to an escrow account established under the Exchangor’s tax identification number. The funds are held in the escrow account until needed for the replacement property closing to occur within 180 calendar days of the relinquished property closing.
The 1031 exchange Qualified Intermediary (QI) was one of four safe harbors the 1031 Regulations created in 1991 for use in a 1031 exchange to fulfill the requirement that the taxpayer is not in actual or constructive receipt of exchange funds or property as part of a 1031 exchange. If it is determined that the taxpayer has or had access to the funds during the exchange, the 1031 exchange may very well be nullified and taxes deferred due. A QI under Safe Harbor Number 3 is not recognized as the taxpayer’s agent for purposes of the 1031 exchange.
A delayed or forward 1031 exchange is when the old or relinquished property is sold and subsequently replaced with property in a second transaction. The 1031 exchange benefit is the tax deferral or postponement of the capital gains triggered upon sale. The tax deferral is an interest free loan the Exchangor enjoys for as long as the replacement property is owned.