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1031 Exchange - Step-by-Step (from a landlord’s perspective)

Step 1- Make a plan with your agent and exchange intermediary

Be sure to sit down and take the time to systematically craft a detailed plan with your real estate agent/broker, CPA and exchange intermediary. An exchange intermediary is an entity that will hold hold your exchange funds, similar to an escrow company. The intermediary will also provide invaluable advice, knowledge and guidance. They are 1031 exchange experts. We generally recommend working with Xchange Solutions or IPX 1031.

Step 2- Enter into a purchase contract with the buyer of your “Down-Leg”*

Once your exchange plan has been specifically tailored to your needs and all questions are answered, we can enter into a purchase and sale agreement with a buyer. Now, it is crucial to ensure your agent sets expectations properly with the buyer regarding your 1031 exchange. A truly motivated buyer should be willing and able to accommodate your exchange timeline. We recommend including 1 or 2 30-day options in the purchase contract to extend the close of escrow in order for you to identify and enter into contract on your replacement property.

*”Down-Leg” is industry jargon for the property that you are selling.

Step 3- Remove contingencies and start searching for your “Up-Leg”*

Often times, sellers wait until the close of escrow to start searching for their replacement property. We we recommend a more proactive approach. Upon removal of contingencies (and even before), now the hunt starts! We will need to embark upon a strategic plan to identify and enter into contract with your replacement property. In the period between contingency removal and close of escrow, you will be afforded the ability to extend close of escrow (if 30-day options to extend are incorporated into contract) in order to prolong the commencement of the 45 day identification period.

Extra credit: A good agent can often times get into contract on your replacement property before you close escrow, and sometimes organize the simultaneous close of your “down-leg” and “up-leg” on that same day!

TIP: Get in touch with your lender or loan officer and start gathering your financial documents.

*”Up-Leg” is industry jargon for the property that you are going to exchange into, also known as the replacement property.

Step 4- Close of Escrow on “Down-Leg” (45-Day identification timeline starts tomorrow!).

Upon close of escrow, the proceeds from the sale of your relinquished property will be transferred to an exchange account with your chosen intermediary. Also, your 45 day identification period starts. That is, the time you’re allowed to identify up to 3 possible replacement properties. Of these 3, you’ll need to close escrow on at least 1 of them within 180 days to qualify for deferment of capital gains with IRS tax code 1031.

Step 5- Get your “Up-Leg” under contract - ASAP!

Make sure your agent thoroughly qualifies and helps you analyze the replacement property(s) you intend to purchase with your exchange funds. An effective way to qualify properties and weed out deals that don’t fit your criteria is to request and review as much due diligence information as possible before entering into contract. This limits the number of surprises that can arise in escrow, giving you more peace of mind.

Now is a good time to get all of your financial documents to your lender.

Step 6- Remove contingencies on your replacement property

Once everything checks out, you feel comfortable and satisfied with your new investment property, and all the due diligence items have been reviewed and approved, you can now remove contingencies. Your agent will work with the intermediary holding your exchange funds, coordinate with your lender if you’re obtaining a loan and ensure the escrow company is aligned with your close of escrow date.

Step 7- Close of escrow on “Up-Leg” (exchange intermediary transfers funds)

Time to sign closing documents, fund the purchase and record as the new owner of the property. CONGRATS! Your 1031 exchange is all done!