An IRS 1031 Exchange, also known as 1031 or similar-kind exchange, allows the seller to take the proceeds of a property sale and reinvest them in another property. This is done to defer capital gains, or losses, that would otherwise have been realized at the date of the sale. If done correctly, the process can be smooth. However, mistakes can result in legal consequences, financial loss, or a failed transaction.
Advanced planning is important when you are trying to do a 1031 exchange. Similar-kind exchanges can only be used for properties that are held for business or trade purposes. To determine if a 1031 exchange is right for you, clients should speak with their tax advisors and tax or real estate lawyers. Title officers and real estate attorneys point out that sellers may miss these opportunities by not knowing about 1031 exchanges until closing. However, by that time, it is too late.
A seller can choose a replacement property in a 1031 exchange within 45 days. This is a time limit that may be short for identification, negotiation and financing.
Sellers need to be aware of this 45 day window. They should keep track of the exact date and whether it falls on a weekend or holiday.
A seller’s biggest mistake is failing to identify multiple replacement properties. Sellers may miss a deadline if they fail to have multiple replacement properties identified.
Sellers could be at risk by being a part of a 1031 Exchange if things don’t go as planned. Not just any person can oversee the transaction, but also a qualified intermediary with a great reputation and experience. Failing to do this can lead to mismanagement, loss of funds, or even a breach-of-contract lawsuit. Unregulated markets make it difficult to identify qualified intermediaries. For these types of transactions, sellers should contact tax advisors, tax lawyers, tax attorneys, or real estate attorneys. They can help identify qualified intermediaries that can assist with such transactions.
