The 1031 Exchange Process
Welcome to OLUMIE Holdings' guide to 1031 exchanges, your essential resource for navigating the world of tax-deferred property transactions.
At OLUMIE, we leverage our decades of experience to help investors minimize risks and keep their money safe and secure throughout the like-kind exchanges we facilitate. This ebook offers a detailed walkthrough of each step, expert insights on property identification, and practical tips to ensure a successful exchange.
1
CHOOSE YOUR PROPERTIES
1031 Exchanges are generally only applicable to business and investment properties. You may only perform an exchange of like-kind properties, meaning they’re of a similar use or class — not necessarily of the same condition.
2
DETERMINE PROCEED AMOUNTS
You can only defer capital gains tax on the portion of the sale proceeds you reinvest in the new property. Consider exactly how much you want to reinvest, and how much you want to recoup.
3
TRACK THE DEADLINES
1031 Exchanges work on a rigid timeline. After closing on the sale of your building, you must identify the replacement property within 45 days and close on it within 180 days.
4
KEEP DETAILED REPORTING
After closing on your replacement property, keep your tax advisor in the loop. Be sure to provide them with property information, the exchange timeline, plus the money and parties involved.
Step One
Preparation Phase
-
Property owner signs contract for the sale of real estate.
-
Property owner signs agreement with Qualified Intermediary (QI).
-
Agreement with QI for assignment of real estate sale contract.
Step Two
Funds Handling
The sale closes, and funds remaining after paying existing mortgages and selling costs go into the QI account. This account safeguards the proceeds for the purchase of replacement properties, ensuring tax-deferred status in the 1031 exchange process.
Step Three
Identification of Replacement Properties
Within 45 days of the sale closing, the seller needs to provide a list of potential replacement properties (note: any property recieved within the 45-day period will be treated as identified).
​
-
Written document with an unambiguous description of the replacement property signed by the taxpayer.
-
Hand-delivered, mailed, telecopied, or otherwise sent to the QI, escrow agent, or title company.
-
Replacement properties limited to:
-
3 potential properties OR
-
Any number of properties as long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all relinquished properties​
-
Step Four
Purchase of Replacement Properties
Within 180 days of the sale closing, seller must close on the purchase of replacement properties as identified on the 45-day list.
Step Five
Interest Earned on QI Account
How does interest earned on the QI account paid to taxpayer get taxed?
-
Reference: 1.7872-5(b)(16).
Step Six
Taking Title to New Real Estate
Seller signs purchase agreement. Who takes title to the new real estate?
Additional Notes on Like-Kind Exchange:
-
Only applies to sales of real estate.
-
Property must be:
-
Held for productive use in a trade or business or investment.
-
Can have up to 15% incidental personal property.
-
In standard commercial transactions, personal property is typically transferred together with realty.
-
FMV of incidental personal property should not exceed 15% of the aggregate FMV of the replacement real estate received.
-
Consider using outside cash to purchase personal property over 15% to avoid it being treated as boot and becoming taxable.
-
-
-
Contract for sale must be assigned to a Qualified Intermediary (QI).
Step Seven
Receiving Replacement Properties
Replacement property must be received within 180 days of the day of sale.
-
The actual rule is 180 days or the due date of the taxpayer's return, including extensions.
-
If multiple properties are sold as part of the same sale, the 180-day period starts on the date of the first property sold.
Step Eight
Handling
Buyer Notes
If a note will be paid during the 180-day period:
-
Make the note payable to the QI.