One of the ways through which real estate investors can reduce the amount of tax paid during a sale or defer tax is through engaging in a 1031 exchange. The exchange is usually done under Section 1031 of the Internal Revenue Code hence the name 1031 exchange. As an investor, to successfully take part in a 1031 exchange, you must first understand how the section works.
What Properties Qualify For A 1031 Transfer?
For this kind of exchange to go through, the properties that an investor wants to exchange have to meet certain criteria, and in this instance, the properties have to be similar in nature. Also, the property must be used for business purposes. What does this mean? Residential properties don’t fall in this category and therefore can’t be 1031 exchanged.
There is, however, an exception. A residential property that you rented out for some time after purchase before moving in can qualify as an investment property.
Another important fact investors need to be aware of is that for a property to qualify, it has to be within the United States. It is usual for investors to look out for investment opportunities outside the US, but when it comes to such transactions, it doesn’t matter whether the properties in question are similar; section 1031 can not apply. If, as a seller, your property qualifies for an exchange, then you don’t have to pay capital gains during the 1031 transfer.
To engage in this kind of transfer, one thing that is now clear is that you have to find the right property. There are various ways to locate a property, but 1031 exchange listings have always provided an easier way of locating a property that qualifies. These listings provide several properties hence tasking you to be thorough in your selection.
Tips on how to select 1031 Exchange Properties
1. Work With A Reputable Property Investment Firm
Most investment firms work closely with sponsor companies; hence you are guaranteed 1031 exchange listings that provide you with several options. Further, working with such firms guarantee you thorough due diligence on all properties before being listed. Always ensure that the team you work with has vast experience dealing with forward and reverse 1031 exchanges.
Another thing you will note from the properties offered by these firms is that they are already 1031 exchange qualified hence making it easy for you to make your choice.
2. Broaden Your Options
Being uptight with your options can make or break your search. Always think broad, and as a result, you will end up with several options at your disposal. Your choices can range from an office space, industrial park, malls, home rentals, etc. The term like-kind does not strictly mean that you have to exchange it for another home rental if you have a home rental.
The good news is, if you have a home rental, you can choose to exchange it with an apartment and even land, and here is where the choice of broadening your options will help you.
3. Work With A Broker
Brokers are a very important part of any transfer, including a 1031 transfer. A good broker will at all times help you find good 1031 exchange listings. Even further, they will assist you in the entire process and ensure that special dates are adhered to.
4. Choose A Property That Is Either Higher In Value Than Yours Or Equal In Value
A property lesser in value will require you to pay capital gains. The requirement usually is, the seller pays capital gains for the difference in a lesser value property. If you intend to avoid capital gains completely, then such a property is not perfect for you.
5. Never Rely On A Single Property
Sometimes transactions fail to close, and a 1031 transfer is not exceptional. To guard your interests as an investor, it is important that you have at least two properties for your consideration.1031 exchange properties have a time frame of 180 days to close. Within this duration, you do not have an obligation to purchase all the properties you have selected. You can always settle on one or two without incurring a penalty.
If you are a real estate investor, choosing to go the 1031 exchange route is one of the ways to maximize returns and easily get that property you have been eyeing. To ensure you meet all the requirements of these transactions, never conduct an exchange alone. Always work with a professional.
Author name– Ellen