The idea of a 1031 exchange is one that a lot of people have a problem wrapping their heads around. We believe that for our clients to make the best possible decisions, they need to have all the available information in front of them. That’s why DeferTax aims to educate our clientele about the details of the 1031 exchange before they decide that it’s the way to go.
The 1031 exchange is an IRS-approved technique for the exchange of business assets or property without an immediate tax liability to the owner. In most cases, our clients use 1031 exchanges with real estate, but it isn’t limited to just property. Several depreciable and non-depreciable assets also qualify for 1031 exchange.
The 1031 exchange is a useful tool for both business and property owners since it shields their transfer from transaction costs that would hit a traditional property or business asset sale. The IRS requires a third party to be present to facilitate the transfer. This third party is known as the accommodator, facilitator, or qualified intermediary (QI) for the transfer. DeferTax is one such QI, helping our clients manage their property and business transfers so much more efficiently.
The reverse 1031 exchange is the opposite of a previously mentioned exchange strategy known as the delayed 1031 exchange. It works on the premise that the transferring individual (the exchanger) gives up the asset or property (the “relinquished” item) before receiving one of the same type (the “replacement” item) in return.
Before the delayed exchange gets underway, the exchanger has the responsibility of marketing his or her property as they see fit. When the exchanger finds a buyer, he or she must then execute a sales and purchase agreement signed by both parties. The obligation to sell the property passes to the intermediary (in this case, DeferTax), who will then transfer the relinquished property to the buyer. The proceeds from the sale go into an account and will then be used to purchase the replacement property.
The exchanger has a time limit of forty-five (45) days from the date that the relinquished property was transferred to decide on a replacement property. The exchanger will then negotiate the details of the transfer and execute a sales and purchase agreement with the seller. Once the details are worked out, the exchanger passes his or her obligation to buy to the facilitator (in this case, DeferTax) who will then use the money from the sale of the relinquished property to purchase the replacement property.
DeferTax has a mandate to transfer the replacement property to the exchanger within one hundred and eighty (180) days of the transfer of the relinquished property.
At this stage, phase I of the exchange is completed. In a nutshell, it means that you have finished acquiring a property.