1031 Exchanges, How do they work?

[Mike Parkins]

I'm familiar with the concept of exchanging a property for one of greater value to delay taxes. But, how exactly does the process work? And who is involved in the exchange?

[Dave Foster]

@Mike Parkins, for you the process is nothing different from the normal sell - buy of a piece of  investment real estate.  You use all the regular professionals - title co. realtor, etc as normal. The difference is you must use a qualified intermediary who interfaces with the closing entities on both the sale and purchase.  We document the exchange correctly and direct the funds between the sale and purchase.  The QI presence is imperative.  You must have that independent 3rd party in place prior to the sale and you cannot have actual or constructive control of the proceeds.

From the day you sell you have 45 days to identify in writing your list of potential replacements.  You have 180 days to complete the process.

The tax payer for the old and new property must be the same.  And in order to defer all tax you must purchase at least as much as your net sale.  And you must use all of the proceeds in the next purchase.

Of course within these 6 requirements there are all kinds of little quirks and nuance that your QI guides you through.  But at the end of the day you pay no tax or depreciation recapture on the gain.  You get to use all of that money to buy more investment real estate.  And there is an end game where you have several options to never pay the tax and actually eliminate it after deferring it for years.