How’s A 1031 Exchange Done?
You can time the sale of the two properties in such a way that you can defer taxes on the appreciation, thanks to 1031. Investors have a total of 180 consecutive days – starting on the day of the sale of the relinquished property – to the completion of a 1031 exchange.
However, there’s a catch. For example, within the first 45 days of that 180-day period, investors must identify up to three replacement properties of any value. Only these properties would qualify for the 1031 exchange, but you have the freedom to identify more than three properties, with some stipulations attached. 1031 exchange covers various types of investment properties, including land, commercial real estate, single-family homes, multi-family homes, and condominiums, and you don’t have to exchange the exact same type of property, one-to-one. The most important thing to understand is that the property must be held for investment or commercial use only; primary residences and secondary homes do not qualify.
After the identification of replacement properties by day 45, the investor then waits until day 180 to close on all of the proposed replacement properties. The investor must get a qualified intermediary – who may not be a real estate broker or financial advisor – to successfully complete the process of exchange.
With some calculative thinking, an investor or developer may never have to pay taxes on the capital gains of their investment properties – as long as he or she follows the 1031 exchange rules.
DST, TIC, and NNN properties are very profitable options too.