1031 Exchanges for Dummies

[Steven Andrews]

Hi everyone,

I'm looking for a layman's explanation of how a 1031 exchange works. I did some searching in threads and many of the explanations are pretty complicated. Can someone post a simple step by step guide to the process?

And here are a few questions I have:

1. Do I need to sell my current investment property before starting a 1031 exchange or do I exchange with an offer on a new property at the same time?

2. If I sell first is there a time by which the funds need to be reinvested to qualify for the 1031 exchange (next 6 months, 12 months,etc.)?

3. Do all of the proceeds have to be used? E.g. I have a property for sale that will net 100K. Do I have to apply all 100K to a new property or can I apply only 20K or 40K?

4. I understand a company has to "process" the 1031 Exchange for me. Does that company have to be in the same state as me or as the state where the property will be purchased?

5. Are there any people here affiliated with a company that handles 1031 exchanges?

I think that's about all for now. Thanks in advance for the help with understanding how it works.

Steven

[Michael Skoczylas]

Originally posted by @Steven Andrews:

Hi everyone,

I'm looking for a layman's explanation of how a 1031 exchange works. I did some searching in threads and many of the explanations are pretty complicated. Can someone post a simple step by step guide to the process?

And here are a few questions I have:

1. Do I need to sell my current investment property before starting a 1031 exchange or do I exchange with an offer on a new property at the same time?

2. If I sell first is there a time by which the funds need to be reinvested to qualify for the 1031 exchange (next 6 months, 12 months,etc.)?

3. Do all of the proceeds have to be used? E.g. I have a property for sale that will net 100K. Do I have to apply all 100K to a new property or can I apply only 20K or 40K?

4. I understand a company has to "process" the 1031 Exchange for me. Does that company have to be in the same state as me or as the state where the property will be purchased?

5. Are there any people here affiliated with a company that handles 1031 exchanges?

I think that's about all for now. Thanks in advance for the help with understanding how it works.

Steven

1. You have to have your Exchange at least set up prior to selling your old (relinquished) property, or buying the new property (replacement property) in the case of a reverse exchange. This is a REQUIREMENT since for a 1031 to work - you cannot receive the proceeds of the sale- they must go to the qualified intermediary (in a deferred exchange at least which is what you are talking about). 

2. Once you sell the Relinquished property you have 45 days from the sale to identify a new property- and 180 days from the sale to close on one of the properties you identify. 

3. If you want full deferral of tax then all the proceeds must be used. You can take some proceeds out and pay taxes on those proceeds - in 1031 parlance that is called Boot. 

4. Most 1031 qualified Intermediaries are national and can handle your exchange in any state. 

5. I am affiliated with a QI - you can PM me with any other questions or if you need any help. 

Mike