We have discussed the 1031 exchange in many previous posts, and we introduced several of the rules and requirements you must follow if you decide to sell your farm using an exchange. In this discussion, we identify the step-by-step process of a 1031 exchange so that you have a clearer understanding of the actions you'll need to take with your exchange.
Ensure a 1031 Exchange is Your Best Option
Before embarking on a 1031 exchange, schedule time with an investment professional to discuss your particular situation and ensure that an exchange is the best option for selling your farm. For example, if you are motivated to sell because you intend to use the sales proceeds to set up college accounts for your grandchildren, a traditional sale by listing or auction would be a better approach since a 1031 exchange wouldn't provide the liquidity you need.
1. Develop a Plan with Your Investment Professional
If you and your advisor determine a 1031 exchange is a suitable option for you, they can help create a transition strategy that factors in all timelines and exchange requirements. It's essential to have a detailed plan since unforeseen events can occur during an exchange. You want to be prepared to have alternative solutions if necessary. An example would be if you couldn't close on your replacement property in time because you could not secure financing. Would you have a backup plan? Your investment professional can help ensure that you would.
2. Assemble Your Team
You will want an attorney, tax advisor, and agribusiness real estate agent on your 1031 exchange team. Each brings expertise and perspective that will help you make informed decisions. Your investment professional may understand the mechanics of a 1031 exchange, but you will also need legal, tax, and real estate advice. Once you identify your real estate agent, you can appraise your farm, develop a marketing plan, and list your property for sale.
3. Draft Your Purchase and Sale Agreement
Working with your team, have your Purchase and Sale Agreement prepared. Your agreement will include a cooperation clause that informs both buyer and seller that this transaction is for the purpose of performing a 1031 exchange and that the agreement is assignable to your designated Qualified Intermediary.
4. Identify Your Qualified Intermediary
As you remember, a qualified intermediary (QI) is a person or entity that facilitates the transfer of proceeds in a 1031 exchange. Once you have selected your QI, you will enter into a written agreement notifying the QI of your intent to use it as the facilitator for your exchange.
5. Identify Your Replacement Property
Once you have a contract on the sale of your farm (relinquished property), you have 45 days to select a replacement property or properties. First, you will work with your investment professional to identify one or more properties. You will then notify your QI of your selection(s) in a signed, written document describing the property or properties by name, type, and legal street address.
6. Close on Your Relinquished Property
Your QI will facilitate the transfer of funds when you close on your relinquished property and hold those funds in escrow until you close on your replacement property. You now have 180 days to close on your replacement property.
7. Close on Your Replacement Property
Your QI will facilitate the replacement property purchase and transfer the proceeds from the sale of your relinquished property to the title company and you.
8. Notify Your Tax Advisor of Your Completed Exchange
Inform your tax advisor of all details regarding the completion of your exchange, including closing date, property description, address, purchase price, etc. Your advisor will prepare the necessary property tax forms. Let your advisor know if your exchange crosses over from one calendar year to the next because you cannot file your annual tax return until the exchange is complete. This may require you to request an extension.
While this overview of the 1031 exchange process doesn't address all the work your team of professionals will be completing throughout the exchange, we trust that it helps you understand how all the components of an exchange come together.
If you would like to discuss your farm sale with an experienced 1031 exchange investment professional, fill out the form on the contact us page, and a representative will call you within 24-48 hours.