My friend has a rental property and they've just opened escrow. I asked him if they were doing a 1031 exchange and he said no. I've educated them on it in regards to the tax benefits and they'd like to try and do it. I'd like to help him as much as I can but I haven't done one myself.
My question is what are the next steps?
Is the next step to find a 1031 custodian? Is there paperwork that needs to be filled out? What other things need to happen before escrow closes?
Thanks in advance for your advice.
Find a 1031 intermediary and see if it will work. They will be able to answer your questions.
yes. It is something that must be started before closing but I personally have done them up to the day before but that's never the favorable option. However, it must be done prior to closing on the initial property sale because after closing has occurred it is not reversible.
@Andrew Fielder , Your friend has some time to decide. All the law requires is that the intermediary who will be performing the exchange be in place prior to closing. But now is the time to be thinking about strategy, directions for the next purchase, and selection of a qualified intermediary. For the title company's sake sooner is better than later because they will need some time to provide some documents to the QI and adjust the settlement statement to reflect the assignments of contract and notification of assignments that are required.
The property should be direct deeded from the seller to buyer but the intermediary needs to have signatory on the closing statement and be listed as the assigned contract seller on behalf of the client. Then there is the exchange agreement between seller and QI, and the notification of assignment that needs to be delivered to all parties. All of these documents can and should be signed as part of the closing package. This way everything stays together and there is paper trail directly through the closing entity.
It seems like a lot but really should be seamless if dealing with a good title company and an experienced QI. Nice catch on your friend's behalf. They owe you a steak dinner.