1031 Exchange – Factors To Know

Savvy and experienced real estate investors are well aware that a 1031 exchange is a common tax strategy that helps them grow their portfolio and increase net worth faster and more efficiently.

However, some real estate investors also think that when they do an exchange, they can’t touch the money and must identify what they are going to buy within 45 days. While these facts may be actual, some things to understand ahead of time while deferring capital gain tax to make the process smooth and successful.

• Signing Exchange Documents Before Closing

We all know that 1031 exchange rules allow you to sell your property to someone and acquire your replacement property later from a different person. Hence, by signing off-exchange documents and following other rules, you can be on the beneficial side. It’s also essential to sign exchange documents on or before the date that you close on the sale of your property.

• Consider The Matter Of Expenses

Some expenses can be paid with exchange proceeds that will not cause the deal to be partially taxable. On the other hand, when you are selling the property and giving the buyer credit for security deposits, you are using exchange proceeds for non-exchange expenses, resulting in your exchange being partially taxable.

• Consider Safety And Experience

Fortunately, your intermediary will offer you the necessary guidance through the 1031 exchange process. However, you may require exceptional help when dealing with seller financing, reversing, dissolving the partnership, and other unique issues. Therefore, always consider hiring an expert with relevant experience in the field.

• Think Of Who Will Acquire The Property

The same taxpayer that sells that property should buy the replacement property. Therefore, an investor can sell his relinquished property that has been held by him individually and can take on the replacement property in LLC as long as he is the only owner.

Conclusion

Section 1031 is slowly but consistently moving towards daily conversations by realtors, title companies, and investors. The most significant benefit is that you can change the form of your investment without cashing out or recognizing a capital gain.