Talk with an attorney: Before initiating a 1031 exchange in California, you may want to consult with a tax advisor or real estate attorney to assess whether this strategy aligns with your investment goals and financial situation. The consultation can help in understanding the potential tax implications, eligibility criteria and overall feasibility of a 1031 exchange based on your specific circumstances.
Find a qualified intermediary: A qualified intermediary is an independent third party essential to the 1031 exchange process. They’ll hold the proceeds from the sale of the current property and ensure these funds go toward purchasing the replacement property. It’s vital to choose a reputable and experienced intermediary because they must navigate the complex rules and timelines associated with the exchange.
Identify replacement property: After selling the relinquished property, you have 45 calendar days to identify potential replacement properties. You can identify multiple properties. Remember, the replacement must be of the same or greater value than the relinquished property.
Assess the debt load: Just as the value of the new property must be equal to or greater than the old property, the debt must follow the same pattern. So, if you have a $100,000 mortgage on your current property, the 1031 exchange will only go through on a property with at least the same amount. Remember, more debt means more risk, but you can also divert income that the property generates toward paying the debt, possibly reducing your taxable income.
Sale and fund diversion: Once the relinquished property is sold, the funds go directly to the qualified intermediary, not to the investor. These funds sit in a temporary account while you find the replacement property.
Receive sales proceeds: Lastly, the qualified intermediary uses the funds held to acquire the replacement property, ensuring that the investor does not take direct possession of the proceeds.