We all know how challenging can be the rules for 1031 Exchange. One must follow the rules laid down by the IRS when it comes to the identification of the Replacement Properties for a successful 1031 Exchange.
Here in this article, we are trying to lay down some of the guidelines, which if you follow before starting and during your 1031 exchange process, you will be able to complete your 1031 exchange without any hurdle, stress and without making any mistakes.
- Build your Strategy before selling your Relinquished Property
A lot of time we hear from the Investors on how they decided to move ahead with 1031 Exchange, most of them have the same answer – “we are tired of the rental property that we own; want to exchange this property into another one and want to defer our taxes on the proceeds or profits that we get”. We don’t have any issue with that – we are in the 1031 Exchange business and it’s a day to day affair for us. But we suggest you think over and check for the property that you are going to buy or want to buy before selling the asset that you have. It might sometime turn out that the property that you were trying to buy for an exchange is not available for sell. It is in fact a better idea to find your replacement property, complete all your due diligence on that property first before you relinquish your investment property.
- Build your trust-worthy 1031 Exchange Team
This is one of the main points that you should check before even listing your property for sale. You should make sure you have everyone in your team that you need to complete your 1031 Exchange without missing out on anything. And no 1031 Exchange team is complete without a third-party Qualified Intermediary. As per the rules laid down by the IRS, you are not allowed to use any of the proceeds from the sale of your relinquished property for a successful 1031 Exchange. That proceeds has to go your QI. At 1031Xchange.com, we make sure that you get most experienced QI for your 1031 Exchange in case you don’t have one.
- Always keep your hands-on Backup Replacement Properties
Our 1031 Exchange Experts frequently hear this from the investors: We sold our asset and found a like-kind replacement property very quickly, and then the things fall apart. The seller of the replacement property either gets a better offer, or gets cold feet, or dies and heirs don’t want to sell. Deals like this frequently fall off the escrow. And now the Investor is left with no replacement property and a clock that runs faster now. So, this is the reason we suggest you keep the backup options for your Replacement Property. DSTs prove to be the best options as a backup because they are prepackaged, the amount can be adjusted and can be closed in 2-3 days’ time. Our 1031 Experts are well equipped to handle such situations.
- Start the Due Diligence as early as you can
It’s very important to start scheduling inspections for the replacement property that you want to buy in your 1031 Exchange. You should not wait until your 45-day identification period is completed. If you do so, the seller might have an upper hand in the deal. You should negotiate repair/changes to the property agreements with the seller in that 45-day window only. Yes, you can threaten the seller to pull out of the sale contract on day 46 – but it may leave you subject to the taxes you had hoped to defer on the property you’ve relinquished.
- Don’t keep the size of Property in your Mind
Most investors have this perception about the 1031 Exchange is that they should trade into something of a higher value. But sometimes a smaller size/value property could be a better investment strategy for some investors. If this is one of your situations, you always have the options to pay the capital gains taxes only on the remaining proceeds (also known as “boot”). Or you also have an option to diversify your investment by investing to DSTs(Delaware Statutory Trust) which is also a tax-deferred investment.
The least but the most important thing to keep in mind for a successful exchange is to mark your calendar with the important days. We’ve highlighted this before: the IRS is very strict on dates and it wants you to
- Identify replacement property/properties within 45 days after selling your property
- Close the deal on that replacement property within 180 days after selling your property
1031 Exchange Experts on 1031Xchange.com have the experience to help you navigate through the maze of 1031 Exchange. For more information, click here to connect to a 1031Xchange Experts