Our team at Diversified Investment Strategies is here to help guide you through numerous types of real estate investment decisions, including 1031 exchanges! A 1031 exchange is a great option for real estate investors who want to swap property with like-kind property and avoid paying federal taxes. As long as they follow the timelines and rules of a 1031 exchange, they can sell current investment property and exchange it with like-kind property or properties, and not pay federal taxes on the sale of their original property.
We have tons of information on 1031 exchanges on our website, in past blog posts, on our social media pages, etc., and our team at DIS is always here to answer any questions you may have! There is no limit to the number of 1031 exchanges you may conduct, as long as all rules and timelines are followed.
There are some strict timelines to be aware of when it comes to completing a 1031 exchange. The replacement property or properties must be purchased after the sale of the original property. A replacement property must be identified within 45 days of the sale of the original property, and the acquisition must be completed no later than 180 days after the sale.
So, what happens if the replacement property falls through? Typically, this means that either you’ll have to pay the federal taxes on your investment property sale, or you’ll have to find a last-minute replacement property that you may find less desirable, in order to stay within the 180-day window.
One other, more technical option may be to conduct a reverse 1031 exchange.
To do this, you must plan ahead before selling your original investment property. You can’t own your original property and the exchanged property at the same time, so you’d need to work with a bank or trust company to open a limited liability corporation, or LLC. Before selling, you would find property or properties you want to exchange into. Then you would have the LLC purchase the replacement property. Once purchased, you could sell your current property and then buy the replacement property directly from the LLC.
Like a normal 1031 exchange, all of the proceeds from the old property would need to be invested in the replacement property, including equity and debt. Adequate time should be given to setting up the LLC, as this could take a few weeks, but can often be accelerated with an additional fee. If you plan on financing, be sure to mention this immediately, as some banks won’t finance a reserve exchange. It’s important to find one that will. Also, the total cost will add up to more for a reserve exchange than a regular 1031 exchange, so plan financially for this.
If you’re not sure if a reverse exchange makes sense for you, contact our team at DIS. We’re always here to answer your questions, to offer suggestions based on your unique circumstances, and to guide you through the entire 1031 exchange process!