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How to Begin Your Section 1031 Exchange

We welcome your calls to ask questions about the Section 1031 exchange process; the following, however, is intended to be an overall guide to how to start. Also, see our section on Frequently Asked Questions which may be able to answer some of your questions which are not answered below.  In addition, should you wish to have a meeting with one of the principals, to go over the exchange process or to resolve specific issues or concerns, please call to arrange a conference at our San Francisco Financial District offices; if this is inconvenient for you, we can also have a conference call with you and your advisors.

Selling Your Relinquished Property (Phase I of the Exchange)

Whether you sell through a licensed real estate agent or not is your decision.  However, you should make sure that the following provisions is included in your sale agreement:

bullet "Buyer will cooperate with Seller's Section 1031 exchange at no additional cost or liability to Buyer."

It is disadvantageous to an exchange transaction to agree to provide financing (the "seller carry-back") for the buyer; an "all cash to seller" offer provides the taxpayer with the maximum tax-deferral.

At the same time as you start to sell your Relinquished Property, you should also start (if you haven't already) looking for potential Replacement Properties.

Open your escrow, for the sale of the Relinquished Property, and inform the escrow company that you are going to do a Section 1031 exchange, and that IES will be acting as your Qualified Intermediary; do not hesitate to give them our contact information so that we can begin coordinating with them.

Complete the Phase I Datasheet online, or download and fax to IES at 415-782-5209.

Provide IES with a copy of the signed sale agreement with the buyer, and with the title company's preliminary title report it has prepared for the buyer.  (If you advise us of the name and phone number of your real estate agent, or the name, phone number of the escrow agent, and the escrow/order number, we can coordinate getting those documents from your agents).

IES will then prepare the Exchange Agreement and the other documents to complete the exchange, and will give instructions to the escrow company so that it can close the sale of the Relinquished Property as PHASE I of the Section 1031 Exchange.

As soon as the sale is consummated, and we receive from the escrow agent both the Exchange Proceeds and the certified Settlement Statement, we will inform you of (a) the amount received, and (b) the date which is the end of your 45 day IDENTIFICATION PERIOD, and the date which is the end of your 180 day EXCHANGE PERIOD.

Sometimes, the escrow companies take weeks to get the closing statement to IES due to their backlog of work; it is imperative that you, also, record and keep track of the date when the sale transaction closed, and what date is 45 days later (including the date of closing) and what date is 180 days later (including the date of closing), so that you do not miss the deadlines.  Our notice to you is as a courtesy reminder, only.


Identification of Potential Replacement Properties

The US Treasury Dept. (which includes the IRS) issues "Regulations" that inform how various tax laws are to be carried out.  Under Section 1031, the Regulations describe the various ways, and time limitations, for "Identification".

The taxpayer can identify either:

bullet 3 (three) properties, regardless of the total purchase price, or the purchase price of any one of them.  If two parcels of property are being purchased (i) at the same time and (ii) from the same seller, and the purchase of one of them is contingent on the purchase of the other one (this is an "all or nothing" purchase), they will count as only one property.  To have a valid Section 1031 exchange, one requirement is that the taxpayer must acquire any one or more of these properties.
bullet Any number of properties (without limit), but the total fair market value of all of the identified properties cannot be more than two (2) times (200%) the gross selling price of the Relinquished Property.  To have a valid Section 1031 exchange, one requirement is that the taxpayer must acquire any one or more of these properties.
bullet Any number of properties, without limit to the number or the value, but, if this alternative is used, to have a valid Section 1031 exchange, the taxpayer must acquire as Replacement Property 95%, by value, of all of these properties.

You must comply with these requirements; the IES Identification Form [link to form] should be completed, with specific property identified (if real property, the complete addresses or tax identification number; if a vehicle, then the VIN or serial number, etc.), and the taxpayer should sign it.  The completed signed Identification Form must be received by IES by no later than midnight on the 45th day from and including the date of your closing of the sale of the Relinquished Property.

Purchasing Replacement Property (PHASE II of the exchange).

You will have to acquire one (or more) of the "Identified" Replacement Properties to have a valid exchange, so as soon as possible complete the negotiations to purchase one of these properties.  Once you have a signed purchase agreement, you or your agent should open an escrow for the transfer of this property (the "Replacement Property"), and notify the escrow agent that you are acquiring this to complete your Section 1031 exchange. You should inform the escrow agent that IES is acting as your QI, and have them contact IES.

Submit all relevant data to IES on the Phase II Datasheet online, or download and fax this to your Exchange Coordinator at IES.

IES will then prepare the paperwork for Phase II of your exchange, coordinate the closing with the escrow agent, and fund into the escrow all of the Exchange Proceeds (or such lesser amount as is needed as "cash to close").

The closing of the purchase of the Replacement Property must be completed (and title to the Replacement Property officially transferred to the taxpayer) no later than 180 days from and including the date of closing of the Relinquished Property.

If your tax return is due before the end of the 180th day, you must file for an extension; the "due date" (of the tax return, including extensions which you have timely appled for) will cut off the "Exchange Period", even if you are not at the end of the 180 days.

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