Let's begin with some key terms you should know
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Investment Property: Property held with the intent of realizing appreciation and ultimately a capital gain. Property is not personally used by the seller
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Like Kind Property: Refers to any two real estate properties that are used in a trade, business or for investment purpose, qualify for a tax-deferred exchange. Personal use property does not qualify
- Relinquished Property: The property/properties being sold/exchanged
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Replacement Property: The new property/properties the seller plans to acquire
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Mixed Use Property: Property used for both business and residential, i.e, Office in Home
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Exchange Agreement: Written agreement with named parties and transaction details
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Carry Back Notes: Required if the Relinquished Property has an outstanding debt, i.e., Mortgage
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Exchange Periods: Transaction timelines for a 1031 Exchange
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Identification Period: Refers to the 45 day timeline to identify/name the Replacement Property or properties
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180 Day Exchange: Refers to the maximum time between the sale and purchase(s) of the properties involved in an exchange
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Qualified Intermediary (QI): Also referred to as an Exchange Accommodator, is required to facilitate the 1031 exchange process ensuring all required rules, regulations and timelines are followed correctly, recorded and documented. The QI manages the acquisition/disbursement of funds from the established trust and helps ensure all the documentation required is completed properly to qualify as an exchange
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Settlement Agent: Handles the closing of the sale of the property and/or purchase of the replacement property. Most commonly this is the Title company.
So, what steps are required to properly complete a 1031 Exchange?
Find a buyer for the property you wish to relinquish
Contact Like Kind Exchange to serve as your required Qualified Intermediary (QI)
Place the Relinquished Property under contract (i.e., purchase agreement) with a buyer and assign the contract to Like Kind Exchange (your QI) at closing.
Close the sale of the Relinquished Property, transfer the funds to Like Kind Exchange (QI), funds are held until a Replacement Property/Properties has been identified. Note: This is your Identification Period. You have 45 days after closing to identify your Replacement Property/properties
After identification of your Replacement Property/Properties, notify Like Kind Exchange, place the Replacement Property/Properties under contract (i.e., purchase agreement) with the seller and assign the contract to Like Kind Exchange at closing. Note: You have 180 days to close
Like kind Exchange wires the proceeds from the sale of the Relinquished property to the Replacement Property owner's Settlement Agent. Process is complete!
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