1031 Exchange by realestatetips4u


1031 Exchange

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                                      1031 Exchange

Section 1031 in the Internal Revenue Service is a boon for a prospective investor, selling an
investment property and wanting to make a profit by reinvesting in a similar property elsewhere
in the country. This wonderful concept works on the principle of gain rolling from the old to the

There is widespread ignorance on the modalities about this exchange; as a result, 30-40
percent of property owners end paying tax during the sale. Exchange 1031 not only fructifies
into essential tax savings, but also makes possible the swapping of property in the fairest
manner at places of choice. No wonder that the 1031 Exchange excites the property market
so much.

The new income-generating replacement property gives the investor the double gain of added
income and savings from tax that would have otherwise gone to the IRS coffers.

Besides saving the buyer from a huge tax burden coming in the guise of capital gains, the
instrument offers maximum immunity and flexibility in reinvesting the money gained from the
sale in a replacement property within a given period.

The exchange being time-bound is no kid’s play either. In every exchange of this kind,
Qualified Intermediaries (QI) plays a crucial role connecting the buyer and seller. The Federal
Tax Code makes service of QI mandatory since 1991 in any exchange.

The federal nature of the 1031 Exchange regulations make the Qualified Intermediary play a
wizard in guiding and structuring the exchange, satisfying all parameters and suiting the goals
of the clients. It is the QI who does the paperwork required by the IRS to document the
exchange. The QI carefully prepares all documents and serves the parties with copies of the
exchange agreement, novation agreement and escrow instructions.

The Exchange Agreement reads like a contract between the Exchanger and a Qualified
Intermediary. The Exchanger explicitly agrees to transfer his old property to the Intermediary,
in lieu of a new property to be supplied by the latter within 180 days. The contract outlines all
terms and conditions under which the exchange of properties should take place.

For a 1031 Exchange to take effect, both the old property as well as the new property should
be in the category of investment property, capable of generating income. The examples could
be rental property, bare land, vacation homes or more.

As soon as the old property is sold, within 45 days the seller has to come out with a list
containing two or three probable properties fit for replacement. And the whole process of
purchasing the new property or replacement property from the list must be over in a period of
180 days.

The exchange becomes bona-fide only when the title stays intact and whosoever held title to
the old relinquished property gets the title of the new property.

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                     Discover 101 Amazing Real Estate Tips and Secrets

In between the sale and purchase of property, the seller of the old property would get no
access to the money he accrued from the sale, as the money will be vested with the ‘Qualified
Intermediary’ till the exchange gets over.

This 1031 Exchange process has matured and had many names in the past including Like
Kind Exchange, Deferred or Delayed Exchange, Simultaneous or Concurrent Exchange,
Starker Trust or Exchange, Alderson Exchange, Reverse Exchange, Two, Three, or Four Party
Exchange and Baird Exchange.

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