A 1031 Exchange must be facilitated by a Qualified Intermediary (QI). The QI is the professional executor of the mechanics of an exchange and safe guards the proceeds from the relinquished property sale until they are reinvested into new replacement property. By having an independent party, such as a Qualified Intermediary facilitate the exchange, the taxpayer is fulfilling the safe harbor guideline set forth by the Treasury Regulations. In order to establish this, the QI will require the exchanger to execute an “exchange agreement” prior to the relinquished property closing which will officialize the engagement of a 1031 exchange.
It is very important that the investor notify their escrow company in advance that they will be doing a 1031 exchange. Best practice is to provide the escrow agent and the QI with each others contact information so a connection can be made between the two parties. Once an exchange agreement is executed between the investor and the QI, exchange instructions will then be provided directly to the escrow officer giving them notice of how to proceed with the exchange. Escrow will be made aware that they are to wire the sale proceeds minus any taxable boot reserved by the exchanger to a segregated FDIC insured commercial bank account held by the QI for the benefit of the exchanger.
Once the sale closes upon transfer of the deed and the funds come into the exchange, the QI will notify the exchanger directly of their 45 day and 180 day deadlines. The first 45 days is considered the identification period where the exchanger must locate potential replacement property and identify in writing to the QI before 12:00am midnight of the 45th day. The QI will typically have an identification form already provided to the exchanger to be completed and signed prior to the deadline date. Please keep in mind that if you have any questions regarding the identification, it is best to contact your QI representative well before the deadline date nears so he or she can better explain the requirements of completing the form.
Once the identification is fulfilled and the 45th day passes, the exchanger is then required to successfully close on the identified property or properties before the 180 day deadline. During this time the QI continues to safe guard the exchange funds until a purchase agreement is signed and escrow is opened on the new replacement property. The exchanger is to then execute an assignment agreement with the QI for that purchase property allowing the QI to move forward with wiring the exchange funds for the close of escrow. Once all exchange funds are reinvested into the identified replacement property the exchange is complete. The taxpayer will receive a final accounting statement for their exchange and will need to file the necessary federal and state tax forms for the year the 1031 exchange was completed.
CR Capital 1031, LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of your exchange transaction. Exchangers must consult their tax or legal advisors for advice and clarification on tax rules.