Section 1031 of the IRS is a blessing for a potential investor, selling an investment asset and thinking to make a profit by reinvesting in a similar property somewhere else in the country. This perfect model works on the principle of gain rolling from the old to the new.
There is a general unawareness on the concept of this exchange; as an effect, 30-40 percent of house owners’ end up paying tax in the course of the sale. Exchange 1031 not only becomes productive into vital tax savings but makes possible the trading of property in the most reasonable manner at places of choice. No wonder that the 1031 Exchange motivates the property market so much.
The new income-generating extra property gives the investor the dual gain of added income and savings from tax that else would have gone to the IRS coffers.
Apart saving the buyer from a huge tax liability coming in the pretense of capital gains, the instrument provides maximum protection and flexibility in reinvesting the money gained from the sale in a replacement property within a given period.
The exchange being time-bound is no child’s play either. In all exchange of this kind, Qualified Intermediaries (QI) plays an important role linking the buyer and seller. The Federal Tax Code makes service of QI mandatory since 1991 in any exchange.
The federal nature of the 1031 Exchange regulations makes the Qualified Intermediary play a wizard in guiding and structuring the exchange, satisfying all parameters and suiting the goals of the clients. It is the QI who does the paperwork required by the IRS to document the exchange. The QI carefully prepares all documents and serves the parties with copies of the exchange agreement, novation agreement, and escrow instructions.
The Exchange Agreement reads like a contract between the Exchanger and a Qualified Intermediary. The Exchanger openly reaches an agreement to hand over his old property to the Intermediary, in place of a new property to be supplied by the Qualified Intermediary within 180 days. The contract lists all terms and conditions under which the exchange of properties should take place.
For a 1031 Exchange to take effect, both the old property as well as the new property should be in the category of investment property, capable of generating income. The examples could be a rental property, bare land, vacation homes or more.
Immediately the old property is sold, within 45 days the seller has to come out with a list comprising two or three likely properties proper for replacement. And the entire process of acquiring the new property or replacement property from the list must be over within a period of 180 days.
The exchange becomes bona-fide only when the title remains intact and whosoever held title to the old surrendered property gets the title of the new property.
In the middle of the sale and purchase of property, the seller of the old property would get no access to the money he accumulated from the sale, as the money will be lodged with the ‘Qualified Intermediary’ till the exchange gets over.
This 1031 Exchange process has matured and had many names in the past including Like-Kind Exchange, Deferred or Delayed Exchange, Simultaneous or Concurrent Exchange, Starker Trust or Exchange, Alderson Exchange, Reverse Exchange, Two, Three, or Four Party Exchange and Baird Exchange.