1031 Exchange FAQ

What is a 1031 Exchange?

A 1031 Exchange Account is a tool to defer capital gains tax. Section 1031 of the IRS Code provides for deferring the capital gains tax that may arise from the sale of an investment property. A seller may defer those capital gains taxes by depositing sales proceeds with a Qualified Intermediary for tax-deferred use upon purchasing a like-kind replacement property.

What’s the timeline?

From a real estate transaction standpoint, you can expect the following timeline:

• Day 1: sell property
• Day 45: find a replacement
• Day 180: close on new property

What’s the process?

Your Qualified Intermediary will assist you through the entire 1031 exchange account process. Here are the steps you can expect through the exchange:

1. Prior to closing on your sale property:
   • Complete the Exchange Data Form and W-9 form to provide information for you and your title company.
   • Once we receive these documents, we can execute the UTB 1031 Exchange Agreement.

2. Once the agreement is complete, we start preparing the deferred exchange documents that are required by the IRS. These usually include the following:
   • Relinquished Property Assignment: Transfers to UTB 1031 as QI the right to act on your behalf in the exchange.
   • Notice to Buyer of Assignment: Notifies the buyer of your relinquished property that you are doing a like-kind exchange.
   • Qualified Escrow Agreement: Exchange proceeds received by the QI will be held, invested and distributed by the United Texas Bank in accordance with the terms and conditions of this Agreement.
   • A copy of the contract from your property sale
   • Closing Instructions to the Title Company: We will provide this letter, which gives the closing agent detailed instructions about preparing their documents for the closing and how to handle each of our documents. It also includes our wire instructions so that the funds can be wired to your United Texas Bank Exchange account.

3. The day of your closing starts a 45-day identification period and the 180-day exchange period.
4. From the closing of your relinquished property, the process and required documents will include:
   • Settlement Statement for the Sale (sometimes on a HUD-1 form): Unless you are receiving proceeds from the closing and will pay tax on them, the settlement statement will reflect that no money is being sent to you. Instead, the sale proceeds will be shown as “Exchange Proceeds” on the settlement statement and sent to UTB 1031 as QI by the closing agent. Our exchange fees will be shown on your relinquished property Seller Settlement Statement and will be collected at the time of your replacement property purchase.
   • Notice to Buyer and Sales Proceeds delivered to UTB 1031 and investment account opened: Sales proceeds (exchange proceeds) are securely wired to an interest-bearing escrow account at United Texas Bank using Exchanger’s Tax ID number, and these funds are never co-mingled with any other assets.

5. During the identification period, you identify your replacement property(ies) within 45 days of your relinquished property sale and provide notice of any/all replacement property(ies) to UTB 1031.
   • Provide to UTB 1031 a completed Identification of Replacement Property form within 45 days of the relinquished property closing.

6. Entering into a purchase contract is followed by these steps:
   • Once you’ve identified and signed a contract for the purchase of a replacement property, call us and send (by email/fax) to us a copy of the real estate contract and general closing information. We will prepare the documents for the replacement property portion of the exchange.
   • Replacement Property Assignment: Transfers to UTB 1031 the right to purchase the replacement property on your behalf to complete the exchange.
   • Notice to Seller of Assignment : Notifies the seller of the replacement property that you are doing a like-kind exchange.
   • Closing Instructions to the Title Company: We provide this letter, which gives the closing agent detailed instructions about preparing their documents for the closing, and how to handle each of our documents. It also includes a request for wire instructions so that your exchange funds are wired to the closing agent.

7. Close the Replacement Property Purchase: Within 180 days, you will close the purchase transaction and complete your tax-deferred 1031 exchange. At this point, we will require:
   • Settlement Statement for the Replacement Property Purchase (sometimes on a HUD-1 form): The settlement statement will list UTB 1031 as the Buyer and you as the Exchanger.
   • We will sign the settlement statement as the Buyer, and you will sign as the Exchanger.
   • The funds from your exchange account will be securely transferred from UTB 1031 to the closing agent (by wire) and will show in the body of the settlement statement as Exchange Proceeds. The balance of funds necessary to purchase the property will show at the bottom of the Purchaser Statement as “Balance due from Buyer.” You need to arrange with the settlement agent to have this amount wired to the closing.
   • Interest earned on funds deposited through UTB 1031 may be credited on your Purchase Settlement Statement or transferred directly to you upon closing.