By definition, a 1031 Tax Deferred Exchange is one where an individual who owns business or investment property is allowed to make an exchange for new property without having to incur a tax when a profit is made. So, considering how financially beneficial this, here are steps to carrying out a 1031 Tax Deferred Exchange:
Step #1: Now before you close on the sale of the said property, you should contact a tax advisor for a 1031 tax exchange so as to reserve an account number which you can use on all the exchange documents. It must be said that the owner must set up both an Exchange Agreement and a Qualified Exchange Trust Agreement.
Step #2: The Owner must then assign rights to a Qualified Intermediary according to the Sales Contract while notifying the buyer of this development. This includes a copy of the Completed Assignment of sold property contract as well as sale contract. When closing, the owner will then transfer the title of the sold property to the buyer.
Step #3: The net proceeds of the sale must go to the Qualified Intermediary and NOT to the Owner of the property. These proceeds can be received in the form of a wire transfer or a check payable to the owner which will be invested for the owner.
Step #4: The next step is to fill out the replacement property form by either providing a street address or legal information, leaving no room for ambiguity. The Owner has 45 days to make changes or deem this form invalid but after the 45th day, no changes will be accepted.
Step #5: Now, the owner has to assign rights to the replacement property to the Qualified Intermediary and keep the Seller abreast of this change. This involves sending the Assignment of Replacement Property Contract as well as the Purchase Contract. After this, the Owner then sends a Direction to Disburse Funds from the Exchange Account while also receiving the title of the replacement property directly from the Seller.