A Standard 1031 Exchange, in contrast to a Reverse Exchange or Improvement Exchange, enables real estate owners to sell an existing property and use all profits to purchase a new property or properties without paying capital gains tax. There are several stages involved in the standard exchange process that are important for investors to understand. These include:
- Stage 1: Property Identification
- Stage 2: A Qualified Intermediary
- Stage 3: Like-Kind Purchasing Window
Stage 1: Property Identification
It is necessary to identify qualifying properties as part of your 1031 Exchange before the closing date of your relinquished property. You may identify multiple properties initially and only purchase one of them within the 180 days of closing with the funds from the relinquished property sale. However, you may not use the funds to purchase a property which was not identified initially as part of the exchange before the closing date of your relinquished property.
Stage 2: A Qualified Intermediary
The qualified intermediary holds the funds from your relinquished property sale and subsequently applies those funds to the purchase of whichever identified property/ies you acquire through the exchange.
Stage 3: Like-Kind Purchasing Window
The property/ies which you identify must be of a similar kind to the property you sold (i.e., it must be an investment property, and not a primary residence for the owner). Moreover, the identified property must close within 180 days of the relinquished property’s closing date. If the acquired property’s closing date does not happen within this 180 day window, then the exchange is nullified and capital gains taxes are required on the funds from the sale of the relinquished property.
Conclusion
If you are interested in exchanging a property, schedule a free consultation. If you choose to exchange on your own, it is still important for you to follow these three stages in order for your IRS filings to be in order. In summary, a standard exchange occurs when a real estate owner sells a property first, the funds are held by the qualified intermediary, and dispensed to the seller of the newly acquired property when closing date occurs within 180 days of the relinquished property’s closing date. The three stages of a standard exchange are:
- Stage 1: Property Identification
- Stage 2: A Qualified Intermediary
- Stage 3: Like-Kind Purchasing Window
The best way to ensure compliance with these stages is to submit an intake form on our Plenti Exchange Portal.