What is a 1031 tax free exchange?
This is when your seller wants to sell an investment property (usually a rental) and reinvest all the proceeds into another investment property ( another rental) to avoid the capital gains tax.
In our area, homes appreciate in value and taxes are due on the gain, if it’s just Sold outright. But to defer that tax, the 1031 exchange allows the seller to avoid paying capital gains taxes because they are reinvesting the proceeds from the sale to a property of like kind and equal or greater value. But if the seller touches any of the proceeds, it’s taxable. All proceeds must be held by a qualified intermediary, who holds the funds in escrow and applies them to the newly acquired property at settlement.
Agent duties:
Calendar of Days: There is a strict calendar of days you must keep track.
Upon settlement of the rental (relinquished property) the seller has 45 days to identify potential replacement properties. He can have as many as he wants as potential, but they must be disclosed to the intermediary in writing within those 45 days.
Then he has 180 days to go to settlement on one of those properties.
Outside these time limits then it’s not a 1031 and becomes taxable.
In the listing agreement under other terms write: “This listing will be part of a 1031 like kind exchange at no expense to the buyer”.
Submit listing agreement into Case Processing Sheets and notate it is a 1031.
In the MLS data input under agent remarks, write the same and instruct the buyer’s agent to use the “Contingency and Clauses” addendum and initial next to 2D and sign at the bottom of the page.
Sales Contract: The name of the relinquished and acquired property must match identically. The Contingency and clauses addendum which covers the 1031 wording, must be included.
Coordinate contact information of Settlement company with Intermediary.
The intermediary walks you through the process.
MBH Settlements has a qualified intermediary who will hold the funds until settlement and then apply them to the exchange property.
“Principle 1031” (part of MBH Settlements.)
Contact Todd Mitchell
703-334-2400