- Select the investment property you want to sell.
Not every asset is worth of a 1031 exchange. Considering all the requirements, financial load, and countdown timers, just paying the tax and moving on could be more beneficial. Therefore, you must have a word with your accountant on this.
- List your investment property for sale.
The next step is where you list your property for sale. Your agent or broker will include in writing in the listing paperwork stating your desire to perform a 1031 exchange and the buyer’s willingness to join.
- Start looking for replacement properties.
Not to mention, the day you close on the sale of your relinquished property, the 45-day identification begins. You should start looking for replacement properties soon after closing on the sale of the relinquished property.
- Rope in a qualified intermediary.
A Qualified Intermediary (QI) is extremely important for your 1031 exchange. Therefore, find someone who has a good reputation and ample experience.
- Negotiate and accept an offer.
When someone shows interest in buying your property, you will have to ensure the document clearly states that you’re doing a 1031 exchange, and the buyer will need to agree with it. Though the buyer does not need to make any effort, they may need to sign a few documents, such as assignments or disclosures.
- Sell your relinquished property.
The title company or attorney usually handles the closing, as with any other real estate investment. The only difference is that your qualified intermediary will represent you in the deal, and the proceeds will be transferred to their account, not yours.
- Identify the replacement property within 45 days.
This is the time to designate the properties you might want to buy. Not to mention, you can identify up to three replacement properties or more if you close on 95% of them, or the combined value of the identified properties is less than 200% of the selling price of your relinquished property.
- Close on the first-choice property.
There are handsome chances that one out of the three properties you identify will be your first choice. You should get that property under contract and open an escrow. Make sure the seller knows you are using your 1031 exchange proceeds for purchasing the property. You can also get all three of your identified properties under contract, using contingency clauses that enable you to back out on the ones you later decide not to keep.
- Let your qualified intermediary handle the title company.
Your qualified intermediary is the person who will be working with the title company or closing attorney and check all the Is and cross all the Ts. This isn’t a complex process, and your qualified intermediary should be familiar with it.
- Close and acquire the replacement property.
Finally, the qualified intermediary will hand over your proceeds to the title company or attorney, and acquire the property in a normal transaction, thereby deferring your need to pay the taxes. The beauty of the 1031 exchange is that you can do it over and over again and continue deferring taxes as long as you want. This will help you make some serious wealth over time.