How Do 1031 Exchanges Work?
A business or real estate investor conducts the following procedure to conduct a 1031 exchange:
1. Choose a Qualified Intermediary
When choosing a qualified intermediary, the exchangor should consider the candidate’s expertise, fees, accessibility, and method of holding the exchange funds. Exchangors can find potentially qualified intermediaries through the Federation of Exchange Accommodators, an organization that represents professionals who facilitate like-kind exchanges. As members must undergo criminal background checks and adhere to the FEA Code of Ethics and Conduct, interested exchangors can be confident about the trustworthiness of candidates they find in the organization’s directory.
2. Sell the Relinquishable Property
With a qualified intermediary in place to receive the funds, the exchangor can now sell the property they wish to relinquish. At the point of sale, their window of opportunity for closing on a replacement property begins to close.
3. Identify Potential Replacement Properties
The next step is to find and document the potential properties the exchangor may use to complete the 1031 exchange. As mentioned, they have just 45 days to identify and describe these properties in writing. The exchangor then signs the identifying documents and delivers them to a party involved in the exchange, such as the qualified intermediary or the sellers of the replacement properties.
4. Close on the Replacement Property
Within 180 days of the sale of the relinquished property, the exchangor must complete their purchase of the identified replacement property. This involves collaborating with the qualified intermediary to transfer the held funds to the seller.
5. Complete and File Form 8824
Form 8824 is used to report like-kind property exchanges to the IRS. It consists of three parts that are to be completed by the exchangor. In part I, they must provide details about the exchange, such as descriptions of the properties involved in the transaction; part II relates to information about the qualified intermediary; and part III is for figuring out the basis of the property one has received.
How Much Does a 1031 Exchange Cost?
The cost of a 1031 exchange can vary wildly, with common estimates ranging from $600 to over $2,000. The specific cost may vary depending on variables such as the following:
Qualified intermediary fees: As the transaction facilitator, the qualified intermediary earns a fair share of the overall costs associated with a 1031 exchange. You might expect to pay $600 to $1,200 for their services alone, but these figures typically cover set-up and administrative fees as well.
Per-property fees: When multiple properties are involved in the exchange, each additional property may incur a fee ranging from $300 to $500.
Closing costs: Some common closing costs in commercial real estate relate to appraisals, brokers, attorneys, inspections, and escrow.
If you are a real estate flipper or investor interested in leveraging 1031 exchanges, we encourage you to get in touch with Anderson Advisors. We can help you navigate the transaction’s rules, costs, and intricacies to overcome the process’s challenges successfully. Schedule your strategy session today to realize the benefits.
Also do not forget about the upcoming Corporate Transparency Act Compliance – take our Quiz now to see if you are required by law.