1031 Exchange Basics

Because of IRC §1031, a properly structured exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC §1031 (a)(1) states:

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."

4 Basic Steps to follow:

Step one: Use of Qualified Intermediary
Before the sale of the first property the Exchanger must complete the documentation prepared by a qualified intermediary. A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. If you are not currently working with a Qualified Intermediary (QI), Navigator Wealth can refer one to you.

Step two: Sale of the Relinquished Property
Investment Property owner signs a purchase and sales agreement and closes on the sale of his/her property. The net proceeds of sale go directly to Qualified Intermediary. Navigator Wealth can also refer a residential or commercial realtor in your area if requested.

Step Three: Identification of the Replacement Property
The Exchanger must identify the property to be purchased (generally called the "Replacement Property") within 45 days following the sale of the Relinquished Property. The taxpayer may generally identify three properties as a potential Replacement Property, or more under alternate rules of identification.

Step Four: Purchase of the Replacement Property
The Exchanger must obtain the Replacement Property within 180 days following the sale of the Relinquished Property, which must be identified property, subject to the rules listed above. The exchanger can identify a sole ownership property or fractionalized ownership property (TIC/DST). Upon closing of the replacement property, the proceeds are paid directly by the QI the exchanger receives the Deed to the replacement property.