You can shield your gains from taxation with a 1031 exchange by investing in another property of equal or more excellent value. Tax-deferred growth is possible for real estate investments if you follow IRS rules.
Among the challenges of a 1031 exchange is finding a replacement property within 45 days of selling the old property.
It’s no secret that sellers are enjoying the luxury of bidding wars and sky-high prices. The current market makes investing much more challenging. Property deals are hard to find, and you cannot guarantee that the property you want will be yours.
If the property has been found and placed under contract, the IRS grants an additional 135 days for the transaction to be completed before the 1031 exchange becomes ineligible.
Strategies for 1031 exchanges
A 1031 exchange strategy works best if you have a plan before you place the property under contract. You must know your available routes before closing to be eligible for a 1031 exchange.
When your current property is under contract, you don’t need to start looking for a second. Even with contingencies, not everyone is comfortable going after the replacement property before their original sale closes. Take only actions that will allow you to sleep at night after determining your risk tolerance.
Each of the four 1031 exchange strategies we discuss depends on where you’re in the sales process. Here are a few:
- Don’t forget to list your property if you haven’t already
- If you have already signed a contract
- If you have already closed
- Make use of reverse exchanges
- Don’t forget to list your property if you haven’t already.
To keep yourself in control, begin by negotiating the sale’s closing, so you remain in charge. The easiest way to do a 1031 exchange is to find a friendly buyer.
When you can’t find someone willing to wait for your property search to conclude, you need to conduct some research.
In the first step, find out how long your market has been on the market (DOM). Knowing this number means you can figure out how long you have to find another property or even how much leverage you have over selling your own.
You are better off letting your exchange die and paying taxes rather than making a bad investment if you cannot find a replacement. Bad investments will make you regret them more in the long run.
