If you’re a real estate investor who is ready to sell your current investment properties and trade them in for other properties, you are likely planning to complete a 1031 exchange. This allows you to trade like-kind investment properties and defer paying federal taxes on your relinquished properties.
If you’re looking for more information on 1031 exchanges, they happen to be our specialty here at Diversified Investment Strategies! Our team can help answer all of your 1031 exchange questions and help guide you through the exchange process.
It is wise to understand the rules of a 1031 exchange before you start your property trade, so that you can plan ahead for certain situations that may arise. If you’ve done research on this already, or you keep up with our blog posts, you may already know that your money needs to be held by a qualified intermediary during the exchange process, you must identify the property you want to buy within 45 days of your closing date, you must trade for like-kind investment property, and you must complete the purchase of your new property no more than 180 days after your closing.
There are a few other tips that our team at DIS would like to share with you today that you may not have heard before. Here’s a few to keep in mind:
1. When you sell your investment property, be sure to put in the contract that this is part of a 1031 exchange! If you don’t sign exchange documents on or before the date that you close on your relinquished property, it will be considered a sale rather than an exchange, and you may need to pay federal taxes on the sale. Exchange documents lay out an agreement between you, the investor, and your intermediary.
2. Choose a qualified intermediary before your sale. Since you need to have these contracts filled out before the sale of your relinquished property, you’ll need to have chosen an intermediary to hold your money during the exchange process. You can’t use your real estate agent or CPA as a QI, but you can ask them for recommendations. It is wise to choose someone you don’t know, but someone who is experienced, qualified and trustworthy. Find out how your funds will be held, whether in a separate account, in an FDIC-insured bank account, invested in securities, etc.
3. Plan for expenses. You will want to buy enough replacement property to defer all gains from your investment property sale, so that you don’t have any gains to pay federal taxes on. However, it’s wise to keep other expenses in mind during a 1031 exchange, such as brokerage commissions, escrow fees, transfer taxes and exchange fees. It’s also wise to have funds of your own available for certain situations, such as giving the buyer of your relinquished property a credit for security deposits or pre-paid rent. If you use exchange proceeds, your exchange may end up being partially taxable.
As always, our team at Diversified Investment Strategies is here to answer all of your questions about 1031 exchanges and to help guide you through the process! Contact us with any questions you may have and let’s get started.
Bryan Hakola
Diversified Investment Strategies
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