Part 2: Delayed 1031 Exchanges: Process and Benefits
What is a Delayed Exchange?
A delayed exchange is the most common type of 1031 exchange. It involves selling your current property first, then purchasing a new like-kind property within specific time frames. This method offers flexibility and is accessible to most investors.
Step-by-Step Process
Sale of the Relinquished Property: Begin by selling your current investment property. A qualified intermediary will hold the proceeds from this sale.
Identify Replacement Properties: Within 45 days of the sale, you must identify up to three specific addresses as potential replacement properties (or more under certain conditions.) This may be called a “delayed exchange”, but time is of the essence in this process.
Purchase of the Replacement Property: Complete the purchase of one or more identified properties within 180 days of the ongoing sale.
Role of the Qualified Intermediary
A qualified intermediary (QI) is crucial in a delayed exchange. The QI holds the proceeds from the sale of your relinquished property, ensuring that you never take constructive receipt of the funds, which would disqualify the exchange. More and more companies are being formed to specialize in 1031 Exchanges, providing you with professional specialists to help walk you through the process. Many commercial real estate brokerages have one or more of these specialists they work with, and can refer you to.
Benefits of Delayed Exchanges
Tax Deferral: Deferring capital gains taxes allows you to reinvest the full amount of your proceeds, increasing your investment power.
Leverage and Growth: Reinvesting in larger or more profitable properties can enhance your portfolio and increase your overall return on investment.
Flexibility: The delayed exchange structure provides time to find the right replacement property, ensuring a strategic investment decision.
In Part 3, we’ll explore the reverse and construction exchanges, offering strategies for more complex investment scenarios.
