By executing a 1031 deferred exchange rather than a traditional sale you are able to build equity and wealth and save money on taxes. When a 1031 tax exchange is completed, the exchangers sell their investment properties, use the equity to purchase a 1031 replacement property of equal or greater value and leverage the equity into the new property. In a 1031 deferred exchange, the investor will not have to pay taxes on any of the proceeds of the sale if it is all reinvested into a new property. This allows an exchanger to sell an older property that is not maximizing their investment dollars (for example, a structurally obsolete house for which it is hard to find good, dependable renters) and replace it with a property with more potential to appreciate and greater ease of management (for example, a NNN fast food restaurant).
The exchanger must plan ahead to enter into a 1031 deferred exchange. The first step is the exchanger finds a Qualified Intermediary (QI) and they enter into an exchange agreement. The agreement will stipulate that the QI acquires the property to be sold from the exchanger and transfers it to the buyer by direct deed from the exchanger. The QI holds all the funds (cash or otherwise) from the sale in a safe account. Than the QI uses these funds to acquire the 1031 replacement property from the sellers and transfers it to the exchanger by direct deed. Thus the 1031 deferred exchange is complete.
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