Steps in Making a 1031 Exchange for a Tenancy-in-Common Property

Piggy Bank, Calculator and CoinsA 1031 exchange tenancy in common (TIC) is a way for you to invest money in property. A TIC means you own a property with one or more people. A 1031 exchange can happen if you have a like-kind property to sell in order to buy into a TIC.

The reason you want a 1031 exchange to get into a TIC is to defer taxes on capital gains. Here are the steps to make that happen.

1. Find an intermediary

The first step in a 1031 exchange is finding someone other than yourself to hold the money when you sell the property. If hold it yourself, you cannot qualify for 1031.

However, it has to be a qualified intermediary. It should not be your lawyer or accountant if they have worked for you in the past two years. Your best option for this is a reputable exchange service.

2. Put up the property for sale

The next step is to list the property you are selling. You may do it yourself, but you have a better chance of selling it at a good price if you have a real estate agent to do it for you.

3. Accept a fair enough offer

If you find a buyer, you have to inform your intermediary so the paperwork can push through. The intermediary will complete and sign the contract in accordance with 1031 rules.

4. Open an escrow account

The intermediary will open an escrow account for you after you accept an offer. All documents needed for the sale, including an initial title search report, go to the escrow company. Once all the documents and money are in, the sale is complete. The intermediary gets the money and closes the escrow account.

5. Find a replacement property

A 1031 exchange means you sell one property to buy another. You have to do this following certain time limits. Once you sell your property and the intermediary has the money, you enter into an identification period of 45 days — in which time you may look for replacement property.

You can actually “swap” properties if you already have a replacement property waiting. For a 1031 exchange TIC, you could buy into an existing TIC or form your own with new investors. In any case, you have to identify the property you plan to buy within that period.

6. Buy the replacement property

If you did not opt to make a simultaneous swap, this is the last stage of the 1031 exchange. You have 180 days from the date of the sale to complete it. This is a very important deadline. If you do not meet it, the sale becomes taxable.

You should make an offer as soon as possible, so you have time to find another property if it is not accepted. As with the sale, the intermediary will do the actual buying on your behalf.

The steps for a 1031 exchange TIC sound simple. However, you have to understand the importance of the time limits. Your exchange service can be a big help in doing this transaction successfully.