What Is Delayed 1031 Exchange?

A delayed §1031 exchange results when the investor’s purchase escrow for the replacement property will close after the closing of the investor’s sales escrow.

In real estate, a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term—which gets its name from the Internal Revenue Service (IRS) code Section 1031,—is bandied about by realtors, title companies, investors, and soccer moms.

To qualify the investor’s profit on their sale for the §1031 exemption in a delayed exchange, the investor needs to:

• avoid receipt of the net sales proceeds from the property sold when the sales escrow closes;

• identify the replacement property within 45 days after closing the sales escrow; and

• close the purchase escrow acquiring the replacement property(ies) within 180 days after the sales escrow closes. Prior to closing the sales escrow, the buyer is requested to cooperate and establish a trust naming a trustee appointed by the investor, the reason for the provision calling for buyer cooperation in the sales agreements. The trustee will receive and hold the net sales proceeds from the property sold. The investor selects an unrelated person as the named §1031 trustee to administer the funds. Thus, the trust arrangement prevents the investor’s constructive receipt of the net sales proceeds on closing. The net sales proceeds of cash and any note carried back on the property sold by the investor are made payable by escrow to the §1031 trustee and delivered to the trustee on closing.

The §1031 trustee, under the trust agreement, impounds the cash funds in an interest-bearing trust account and collects installments on any carryback note.

Later, on the investor’s instruction, the §1031 trustee disburses the money and assigns any carryback paper used by the investor to fund the purchase of the replacement property.

To close out the §1031 reinvestment plan, the replacement property purchased is deeded directly to the investor.

Want to learn how you can trade and defer payment of taxes? Contact me today (925) 570-5130 to discuss your property's §1031 exchange potential.

*Information Contained from First Tuesday