We recommend the following tips to make the process as easy and effective as possible:
- Pre-planning We highly recommend calling ADE prior to putting your relinquished property on the market for sale. When you call, we can discuss your situation and investment objectives and advise you on the best way to proceed. This pre-planning step allows us to proactively recommend steps that often lead to a better outcome.
- Sale of Relinquished Property There are no special steps you need to take when selling the relinquished property in an exchange; it is essentially handled like a normal disposition of property. We recommend that 1031 clause about your intent to exchange is inserted in your sales contract, but it is not mandatory.
- Relinquished Sale and Closing Once the property you are selling (the relinquished property) is under contract with an established closing date, you need to notify us. We will prepare an exchange agreement for you that will also be sent to the closing attorney, escrow agent or title company along with exchange and wiring instructions.
- Identification Period Once the relinquished property has closed, the you have until midnight on the 45th day to identify replacement property. Generally this requirement is fulfilled by the you sending a letter to ADE listing the potential replacement properties you are identifying. There are specific rules as to how many properties can be identified. Once you are beyond the 45 days, you cannot substitute properties and are limited to the properties already listed in your identification letter.
- 180-day Acquisition Period You have 180 days or the filing date of your tax return, whichever comes first, to acquire your replacement property. There are no standard extensions for this time requirement. (Currently, the only exception is property in presidentially declared natural disasters.) This timeframe runs concurrently with the 45-day identification period.
- Replacement Acquisition and Closeout Once the replacement property is under contract, you would supply us with the information necessary for us to provide closing instructions to the closing attorney, title company or escrow officer along with the necessary funds being held for the acquisition. Once the exchange is complete, you will receive a summary of the transaction along with any extra funds that may left over.
Reporting: The proper reporting of a 1031 transaction to the IRS is done on Form 8824 and is sent in as part of your tax return filing. If you do your own return, then you would complete the information yourself. If you have a CPA or accountant, they will require certain documentation to properly fill out the 8824 form.