There are certain factors you must keep in mind before proceeding with your 1031 Exchange. Since it is a complex process, you need to consult a Qualified Intermediary (QI). You must also know the rules for your Identification. Apart from this keeping in mind the timelines is also very important. Read below to know 5 important things before going for your 1031 property exchange.
1. Before you sell, you need a Qualified Intermediary(QI):
All exchange transactions, from selling the old property to buying the new one or ones, must be done with the help of a Qualified Intermediary (“QI”), also called a 1031 Accommodator or Facilitator. The QI’s job is to help you get through the complicated 1031 real estate exchange process and make sure you follow all of the rules and requirements of the exchange code. A qualified intermediary (QI) is a separate entity that is not the investor, an agent of the investor, or a party related to the investor. The QI signs a written contract with the investor to handle the exchange transactions on their behalf so that they can meet the requirements of 1031 real estate exchanges.
2. Know the rules for your ID:
When looking for possible replacement properties, 1031 exchange investors must follow one of the three rules for identification. The Three Property Identification Rule, the 200 percent of Fair Market Value Identification Rule, and the 95 percent Identification Exception are all examples of these rules. Find out more about the rules for identifying people here.
3. Know the 45-day period for identifying yourself:
For a 1031 real estate exchange, there are very clear rules about the identification period. In a 1031 exchange, replacement properties that are being considered for purchase should be named to the QI. This must be done no later than midnight of the 45th calendar day after the sale of the property being given up.
4. Be aware of your 180-day closing window:
Once replacement properties have been identified, the seller has 180 calendar days from the date of their property sale to complete the exchange. This means they must buy a replacement property or properties and have the funds transferred by a qualified intermediary by the 180-day deadline. If the due date of the income tax return for the tax year in which the previous property was sold falls within the 180-day window, this window may be shortened. In that case, the sale must be completed by the due date on the tax return. If the deadline passes without the sale being completed, the 1031 exchange is considered a failure, and the proceeds are taxable.
5. Have a backup plan:
One of the main benefits of Delaware Statutory Trusts is that you can identify a DST as one of your replacement properties by the end of the 45-day 1031 exchange identification period. If the properties cannot be closed for any reason during the 180-day period, the trust can be used as a backup. In a 1031 Exchange, Delaware Statutory Trusts can be a good backup plan.