1031 Exchange Agreement: The Ins And Outs Of Agreeing
A 1031 exchange agreement is a written agreement between an investor and the person or firm he contracts to act as his qualified intermediary, also known as a facilitator or accommodator. The duties of the qualified intermediary as required by Section 1031 of the Internal Revenue Code are listed in the 1031 exchange agreement, and include the following: to receive any funds realized from the sale of the property to be exchanged, to deposit funds in bank account separate from the investor’s other funds and to oversee the paperwork needed to make a successful exchange.
The qualified intermediary stated in the 1031 exchange agreement must not be a relation of the investor or any other person close to the investor. Also, the investor may not act as his own qualified intermediary. The role of the qualified intermediary is used to satisfy the Section 1031 requirement that the transaction be an exchange, not a sale or a resale. The 1031 exchange agreement states in writing that the investor is giving up all rights to the handling of the funds generated by the exchange, giving the qualified intermediary the status of safe harbor and allowing the application of the tax-deferring aspects of Section 1031. It is important that the desire to perform an exchange is clearly stated in the contract, along with the other required points demanded by Section 1031. Otherwise, the exchange will not be successful, and the 1031 exchange agreement will become null and void.
The requirements of a 1031 exchange agreement must meet the following procedures and timetables detailed by Section 1031. The investor must inform the qualified intermediary of his choice or choices of exchange properties within 45 days of the sale of his relinquished property. Properties must comply with the like-kind definition, meaning the property must be real estate that can be used in a commercial venture or investment. The original like-kind property may be exchanged for like-kind property of equal or higher value. Exchange properties may be exchanged for multiple properties as long as all requirements are met. The investor is not limited in how many 1031 exchange agreements or property exchanges he attempts. Using Section 1031, the investor is allowed to exchange properties as frequently as he likes. The properties involved in an exchange must be located in the United States; properties in foreign countries and territories are not classified as like-kind properties, and are therefore excluded from the property exchange process.
Section 1031 of the Internal Revenue Code is a complex document and requires extensive studying. Input from a qualified real estate legal advisor is recommended for all investors in order to obtain the most benefits from the document, and to avoid the most costly mistakes. Careful research into the definition of like-kind property, and the finer points of the 1031 exchange agreement, is necessary in order to earn the most capital gains tax deferments. Otherwise, the venture can be counterproductive; violations of the Internal Revenue Code can result in fines, investigations and even prison sentences, and investors should be completely prepared before they attempt property exchanges.
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