When engaging in a 1031 exchange, the paperwork and documentation are crucial to ensure compliance with IRS regulations and to successfully defer capital gains taxes. At Deferred.com, we play a pivotal role in handling the paperwork as your qualified intermediary (QI). Here’s a detailed breakdown of how the process works and the responsibilities involved:

1. Engagement of a Qualified Intermediary (QI): As your QI, Deferred.com is responsible for facilitating the exchange process. We are not considered your agent for tax purposes, which helps maintain the tax-deferred status of the exchange. Our role is to ensure that you do not have actual or constructive receipt of the funds from the sale of your relinquished property.
2. Exchange Agreement: We will enter into a written exchange agreement with you. This agreement outlines the terms of the exchange, including the identification and acquisition of replacement property. It also specifies that you have no rights to receive, pledge, borrow, or otherwise obtain the benefits of the money held by us until the exchange is completed.
3. Transfer of Relinquished Property: When you sell your relinquished property, we handle the transfer of the property to the buyer. We also receive the proceeds from the sale, which are held in a qualified escrow account or trust to prevent you from having constructive receipt of the funds.
4. Identification of Replacement Property: Within 45 days of the sale of your relinquished property, you must identify potential replacement properties. We assist in documenting this identification process to ensure compliance with IRS regulations.
5. Acquisition of Replacement Property: Once you have identified the replacement property, we facilitate the purchase. We use the proceeds from the sale of your relinquished property to acquire the replacement property on your behalf. This step must be completed within 180 days of the sale of the relinquished property.
6. Documentation and Reporting: Throughout the process, we maintain detailed records of all transactions and communications. This includes the exchange agreement, identification of replacement property, and closing statements. We also provide you with the necessary documentation to report the exchange on IRS Form 8824, which you will file with your tax return.

Example:

Let’s say you own a rental property valued at $500,000, which you decide to sell. You engage Deferred.com as your QI for a 1031 exchange. We enter into an exchange agreement with you and handle the sale of your property. The proceeds, $500,000, are held in a qualified escrow account.

Within 45 days, you identify a replacement property, a commercial building valued at $600,000. We facilitate the purchase of this property using the $500,000 proceeds and an additional $100,000 you provide to cover the difference. The transaction is completed within the 180-day timeframe.

Throughout this process, we manage all the paperwork, ensuring compliance with IRS regulations and providing you with the necessary documentation for your tax filings. By using Deferred.com, you benefit from our “No Fee Exchange,” saving you money while ensuring a smooth and compliant 1031 exchange process.