Steps to accomplish 1031 exchange

The following sequence represents the order of steps in a typical 1031 exchange:

Retain the service tax counsel.

Sell the property that includes Cooperation Clause. "Buyer is aware that the seller's intention is to complete a 1031 Exchange through this transaction and hereby agrees to cooperate with seller to accomplish same, at no additional cost or liability to buyer.

Enter into a 1031 exchange agreement with your Qualified Intermediary, in which it is named as principal in the sale of your relinquished property and the subsequent purchase of your replacement property.

The 1031 Exchange Agreement must meet IRS Requirements, especially pertaining to the proceeds. Along with this, an escrow is to signed which so names the Qualified Intermediary as seller.

The funds should be placed in a separate, completely segregated money market account to insure liquidity and safety. The closing date of the relinquished property escrow is Day 0 of the exchange, and that’s when the exchange clock begins to tick. Written identification of the address of the replacement property must be sent within 45 days and the identified replacement property must be acquired by the taxpayer within 180 days.

The taxpayer sends written identification of the address or legal description of the replacement property to the Qualified Intermediary, on or before Day 45 of the exchange. It must be signed by everyone who signed the exchange agreement, and it may be faxed, hand delivered, or mailed either to the Qualified Intermediary, the seller of the replacement property or his agent, or to a totally unrelated attorney. Send it via certified mail, return receipt requested. You will then have proof of receipt from a government agency.

Taxpayer enters into an agreement to purchase replacement property, again including the Cooperation Clause. "Seller is aware that the buyer's intention is to complete a 1031 Exchange through this transaction and hereby agrees to cooperate with buyer to accomplish same, at no additional cost or liability to seller.

" An amendment is signed naming the Qualified Intermediary as buyer, but again the deeding is from the true seller to the taxpayer.

When conditions are satisfied and escrow is prepared to close and certainly prior to the 180th day, per the 1031 Exchange Agreement, the Qualified Intermediary forwards the exchange funds and growth proceeds to escrow, and the closing statement reflects the Qualified Intermediary as the buyer.

A final accounting is sent by the Qualified Intermediary to the taxpayer, showing the funds coming in from one escrow, and going out to the other, all without constructive receipt by the taxpayer.

Taxpayer files form 8824 with the IRS when taxes are filed, and whatever similar document your particular state requires.

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