In a rush of closing a 1031 exchange and saving taxes, you might forget to do the needful, that is, to plan everything in advance. When doing a 1031 exchange, it gets immensely important that you work as per the calendar because the IRS is quite strict when it comes to deadlines. So, you better not miss any. To complete a 1031 exchange, you get 180 days. However, your task begins way before you sell your investment property.
Identification Period is crucial.
Once you sell out your investment property, you should be ready with your identified property. Though you get 45 days to submit your identification, this one and a half months’ time won’t last forever. In fact, it could end within the blink of an eye. Hunting for properties days before your identification is a good option. Make a list of all potential properties that you see as options. You can also obtain a 1031 exchange properties list from a local broker or a real estate firm. You may need to pay a small fee for the favor. However, it will save a lot of time.
There are alternates if you fail to come up with an identified property.
Though everyone knows the drill, there are still times when investors fail to identify a replacement property. The availability of the property plays a vital role here. Say, you identified two properties for your 1031 exchange. The seller had assured you of possession on a fixed date. However, at the last minute, he backs out of the deal. What would you do then? You certainly cannot identify another property in so little time. To help you with this, the IRS has left alternates for 1031 exchange replacement properties. A DST or TIC investment also qualifies for a 1031 exchange.
How a 1031 DST Exchange works?
A DST or Delaware Statutory Trust is a private governing trust that owns, manages, and sells investment properties. A DST comprises of more than a hundred shareholders or beneficiaries, sometimes, even more. It is managed by a board of directors or trustees. A DST usually has a diverse portfolio containing expensive investment properties. When you invest in a DST, you invest in one of the properties of that DST. It gives you an opportunity to co-own a valuable property, which otherwise might be out of your pocket. Plus, a 1031 DST Exchange lets you defer taxes. It’s a win-win situation in any way.
You can do both simultaneously.
If you don’t want to invest your entire proceeds into a DST or are left with some cash at the end of your 1031 exchange, you can still take DST along your exchange. Say, you identified a replacement property of less value. Obviously, you will be left with some cash at the end of your exchange. To avoid the boot, you can invest the remaining amount into a DST and complete your 1031 exchange. This is the reason why investors prefer 1031 DST Investment. It is so flexible.