It is important that any exchange be carefully planned with the help of an experienced, competent and creative legal and exchange professional. Preferably one who is completely familiar with the tax code in general, not just Section 1031, and who has extensive experience in doing many different kinds of exchanges. Thorough planning can help avoid many exchanging pitfalls and also ensure that the Exchanger will accomplish the overall goals which the transaction is intended to facilitate.
Once the exchange planning is complete, the exchange structure and timing are decided, and the Relinquished Property is sold and the transaction is closed, the facilitator will generate the appropriate exchange documentation and set up a trust account to hold the sale proceeds. Remember to have the exchange documents and trust account set up prior to the closing of the relinquished property. This is critical.
When the relinquished property closes the exchange proceeds will be wired to the Qualified Intermediary for the benefit of the Exchanger. This closing also starts the Exchanger's 45 and 180 day clock. Meaning, they will need to identify candidate replacement property within 45 days of the closing and subsequently close on all the replacement property within 180 days.
We reference the replacement property identification process elsewhere.
The 1031 funds should be kept in a trust account for the benefit of the Exchanger or in a Qualified Escrow Account until the Replacement Property is located and instructions are received to fund the Replacement Property purchase. The funds are then wired or sent to the closing entity in the most appropriate and expeditious manner, and the Replacement Property is purchased and deeded directly to the Exchanger. All the necessary documentation to clearly memorialize the transaction as an exchange are provided by the facilitator, such as exchange agreements, assignment agreements for assigning