Recording a 1031 exchange involves several steps, and it's crucial to ensure that all aspects of the transaction are documented correctly to maintain compliance with IRS regulations. Here's a detailed guide on how to record a 1031 exchange, with an example to illustrate the process.

1. Identify the Relinquished Property: The first step in a 1031 exchange is to identify the property you intend to sell, known as the relinquished property. This property must be held for productive use in a trade or business or for investment purposes.
2. Engage a Qualified Intermediary: At Deferred.com, we act as your qualified intermediary (QI) to facilitate the exchange. This means we will hold the proceeds from the sale of your relinquished property and use them to purchase your replacement property. This step is crucial because it prevents you from having constructive receipt of the funds, which would disqualify the exchange.
3. Sell the Relinquished Property: Once the property is sold, the proceeds are transferred to us at Deferred.com. We ensure that you do not have direct access to these funds, maintaining the integrity of the exchange.
4. Identify Replacement Property: Within 45 days of selling your relinquished property, you must identify potential replacement properties. You can identify up to three properties regardless of their value, or more if they meet certain valuation criteria.
5. Purchase the Replacement Property: You have 180 days from the sale of the relinquished property to close on the purchase of the replacement property. We at Deferred.com will use the proceeds from the sale of your relinquished property to acquire the replacement property on your behalf.
6. Record the Exchange on IRS Form 8824: This form is used to report the exchange to the IRS. It includes details such as the description of the properties involved, the dates of the transactions, and the financial details of the exchange. You will need to calculate the realized gain, recognized gain, and any boot received.

Example: Let's say you own a rental property that you purchased for $200,000, and it's now worth $400,000. You decide to sell this property and use the proceeds to purchase a new rental property worth $450,000.

• You sell your original property for $400,000. After closing costs of $20,000, the net proceeds are $380,000. These proceeds are transferred to us at Deferred.com, your QI.
• Within 45 days, you identify a new property worth $450,000 as your replacement property.
• We use the $380,000 proceeds to purchase the new property on your behalf, and you finance the remaining $70,000 through a mortgage.
• On IRS Form 8824, you report the sale of the relinquished property and the purchase of the replacement property. You calculate the realized gain, which is the difference between the sale price of the relinquished property and its adjusted basis. In this case, the realized gain is $200,000 ($400,000 sale price – $200,000 original purchase price). However, because you reinvested all proceeds into a like-kind property and did not receive any boot, the recognized gain is $0, deferring the tax liability.

By following these steps and using Deferred.com as your qualified intermediary, you can successfully complete a 1031 exchange and defer capital gains taxes. Always consult with a tax professional to ensure compliance with all IRS requirements and to address any specific concerns related to your exchange.