Written by: Capital Rivers Commercial
A 1031 Exchange, also known as a “like-kind” exchange, is a powerful tool for real estate investors looking to defer paying taxes on their profits. This type of exchange allows investors to use the profits from the sale of a property to purchase a new property, without paying taxes on the profits in the process. But, as with any real estate transaction, a successful 1031 Exchange requires a well-executed plan and a team of professionals to guide the process. Capital Rivers has a brokerage team with extensive knowledge of 1031 Exchanges and how to navigate through the process.
The following are the steps to successfully execute a 1031 Exchange:
- Consult with a qualified intermediary: This person will serve as an independent third party to handle the exchange process, and ensure that all IRS rules and regulations are followed. Our team of real estate professionals that can provide you referrals to qualified intermediaries.
- Identify the property you want to sell: This is the property that you will be selling in order to use the profits to purchase a new property.
- Our Brokers can assist you in the marketing and sale of your property to be sold as well as to help you identify replacement properties.
- While your property to be sold is on the market, you can begin to Identify the replacement property you want to purchase: This is the property that you will be purchasing with the profits from the sale of the first property.
- Enter into a purchase and sale agreement for the sale of the first property: This is the legal document that outlines the terms of the sale of the first property.
- Notify the intermediary of the exchange: Once the purchase and sale agreement for the first property has been signed, the intermediary should be notified of the exchange.
- Provide the intermediary with the purchase and sale agreement for the replacement property: This is the legal document that outlines the terms of the purchase of the replacement property.
- Provide the intermediary with the necessary documentation for the exchange: This includes any documents required by the IRS, such as form 8824.
- Close on the sale of the first property: Once the sale of the first property has been completed, the proceeds can be used to purchase the replacement property.
- Talk about the time required after the close of escrow to identify replacement properties (45 Days) and the timeline that needs to be adhered to to close on the replacement property(180 Days).
- Use the proceeds to purchase the replacement property: The profits from the sale of the first property must be used to purchase the replacement property within a certain timeframe set by the IRS.
- Obtain title to the replacement property: Once the purchase of the replacement property is complete, the title should be transferred to the investor.
- Provide the intermediary with the necessary documentation to complete the exchange: This includes any documents required by the IRS, such as form 8824.
- File form 8824 with the IRS to report the exchange: This is the form that must be filed with the IRS to report the exchange.
13. Consult with your tax professional: This is to ensure that the exchange is done correctly and to answer any tax questions that may arise.
- File your tax return: This is to report the exchange to the IRS.
- Enjoy the benefits of tax deferred profits!
In conclusion, a 1031 Exchange can be a complex process, but with the right team in place, it can be a powerful tool for real estate investing. Consult with a qualified intermediary and your tax professional to ensure a successful 1031 Exchange.
We understand commercial real estate is complicated. To help our clients maximize their efforts with franchise investment opportunities, Capital Rivers Commercial in Sacramento operates in a collaborative environment. All of our brokers specialize in a specific sector of commercial real estate, but we work together to share industry expertise and market knowledge. This approach allows us to have many resources available when working on a project. The variety of expertise developed in our careers prior to and at Capital Rivers benefits the real estate brokers when working with franchisees and franchisors.
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