The 1031 Exchange Institute

Welcome to The 1031 Exchange Institute™. The 1031 Exchange Institute is your complete online resource for 1031 exchange, 1033 exchange, 1034 exchange, 721 exchange, 453 installment sale and 121 exclusion information.  Information will also be provided regarding Self-Directed IRAs, including Traditional IRAs, ROTH IRAs, SEP-IRAs and SIMPLE IRAs. 

The 1031 Exchange Institute is dedicated to educating and informing real estate investors and their advisors on the benefits of 1031 tax-deferred exchanges and other tax deferred and tax exlcusion strategies so they can make better informed investment decisions.

1031 Exchange Discussion Forum > What NOT To Do in a 1031¬†Exchange

1031 Exchanges are a lucrative but delicate series of transactions. They must be must be properly constructed and executed to avoid disqualifying the exchange. Slight errors, miscommunications or bad timing can make all the difference when it comes to deferring capital gains taxes when selling and acquiring new properties. For example, the tax code has very specific requirements related to the types of properties that may be used in a 1031 exchange. The code also outlines the window of time allowed between closing on one property and closing on the other, regardless of whether it's a Reverse Exchange or a delayed exchange.

The most important element of a 1031 Exchange is this: Never take possession of the profit from your first sale. The moment you're in possession of the funds, you must pay capital gains taxes.

Unfortunately, many investors make the mistake of procuring a cashier's check from the first sale and holding it until closing on their new property. Even though the check is never cashed and has rested in a sort of "limbo" state where it wasn't able to be used or invested while in their possession, it still counts as "cash" and therefore prevents the property from being used in a 1031 exchange. The investor must pay capital gains taxes on that profit before reinvesting the remainder.

How then, can you make the second purchase using the funds from the first sale? Even if you orchestrate both sales to take place on the same day, there is still a very small window of time (hours, really) where you would technically be in possession of the funds.

This is where Qualified Intermediaries (sometimes referred to as "Accommodators" or "Exchange Facilitators") come in to play. They're essential for ensuring the IRS does not disqualify the exchange. The Qualified Intermediary does more than hold the funds between the closings of the two properties. They are also able to help with the other crucial aspects of the Exchange. The QI will know which of your current properties are eligible for an exchange. They can help identify new properties that qualify under the "like property" restrictions of the 1031 tax code. And of course, they'll insure that you've completed all the necessary paperwork to identify and close on your properties within the restricted window of time required by the IRS.

Need help facilitating a 1031 Exchange? For a free consultation and assessment of your investment opportunities, please call Chris Schellin, president of Westwood Net Lease Advisors at 314-563-2208, cschellin@westwoodnetlease.com, or visit http://www.westwoodnetlease.com/about-us/contact/ to use our contact form.
March 10, 2013 | Unregistered CommenterChris Schellin