Exchange Documents

Using a third party intermediary to prepare your exchange documents is a must when performing a 1031 exchange. The intermediary cannot be your attorney, your CPA, your real estate agent, or your title company. There are companies that specialize in 1031 exchanges who will prepare the exchange documents for you. The language must be very specific, so they will help you with the paperwork.

Preparing Exchange Documents

In addition to preparing the exchange documents, the facilitators will also coordinate with the escrow company. Be aware that you must have the documents in place and signed before you close. You will not receive any of the proceeds of your sale; they will go to the facilitator. You should investigate the intermediary company to make sure they are reputable before entering into any agreements with them.

You must also identify the replacement property, in writing, to the facilitator. You have 45 days to do this and you can identify up to three properties, or more if they do not exceed 200 percent of the fair market value of the relinquished property. You have 180 days from closing to close on replacement property.

If you go over the 180 days, you owe the taxes, fair and square. If you want to do a 1031 exchange, you should plan it in advance and have possible replacement properties as quickly as you can. Note that rarely do all parties walk away without paying some taxes upfront. There is usually a difference in profit that you must pay taxes on.