A 1031 tax deferred exchange step-by-step guide

(c) Copyright 2006 by Mark Hays

This article will teach you a really simple way to do a 1031 tax deferred exchange. It’s easy to do and the tax savings benefits are phenomenal. That is why a 1031 exchange is one of the most commonly used tools for tax deferral in real estate. For more on 1031 Exchange Rules, read article on 1031 Exchange Rules - the Basics.

The first step of a 1031 tax deferred exchange is to simply list your real estate for sale. You do this the normal way such as with a real estate agent. However, you must make sure that the realtor knows that you plan to do a 1031 exchange when you have a contract. This does not impact the realtor’s commission but the realtor has to do some extra work to facilitate your 1031 tax deferred exchange. So, this step is simple and is the same for anyone selling a house whether it is for a 1031 exchange purpose or not.

Once you have an offer, you need to add to your real estate contract a little line about the 1031 exchange.

If you have a realtor, the realtor will be able to prepare the entire real estate contract for you. The real estate agent will also add for you a counteroffer provision including the 1031 exchange. This addition states that the ‘buyer agrees to cooperate with the seller’s 1031 exchange.’ Your only job in this step is to make sure that your real estate agent includes the clause to the sale contract before your sign it.

Next, you need an accommodator or a qualified intermediary for the 1031 tax deferred exchange. But don’t worry, they are easy to find. Because you are going to be taking a major tax benefit, you cannot do it by yourself. An accommodator or a qualified intermediary whose job is to facilitate and document 1031 exchanges is required. Your realtor or title and escrow company should be able to refer you to a local company who can facilitate 1031 exchanges for you. The accommodator will handle all the paperwork for you in the background and you won’t have to worry about it at all.

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