Questions on 1031 exchange everyone deserves answers for

From the first day the Government has implemented the 1031 exchange strategy, many real estate investors have taken advantage of it and started to do business applying it. The greatest advantage this strategy comes with is that it allows investors to defer taxes. However, there are still many questions related to 1031 exchange options, rules and regulations, so here are the most frequently asked ones.

 

What properties qualify?

According to experts, any type of property that is being held for investment or for productive use in either business or trade qualifies for exchange for like-kind property. One of the most misunderstood aspects of the 1031 strategy is related to this term – “like-kind”. It does not refer to the form, but to the nature of the investment. This means that if you own a single-family residence for instance, you can exchange it for a duplex, or in the case of raw land, you can exchange it for an office for apartments. There are many combinations that will work.

What does not qualify then?

The 1031 exchange generally excludes certain properties that are used in business or trade or for investment and they imply bonds, stocks, interests in partnerships, securities and notes. Also, those properties that are being held “primarily for sale”, such as business inventory, do not qualify for 1031.

How should investors get started with 1031?

The first thing to start with in doing this type of business is to contact an exchange facilitator. It is recommended that before you contact the facilitator, you ensure you have all information needed related to the parties of the transaction, such as names, contact details, file numbers and so on. Expect for the facilitator to ask you questions on both the relinquished and the potential replacement properties.

Which facilitator should I select?

It is best that you go to an exchange facilitator company that has several years of experience in this industry and that knows exactly what is to be done to provide you with the desired results. Do some research on the Internet and look for facilitators in your region that meet your criteria. Opt for the one who has the best reputation.

Are there any time requirements in the 1031 exchange?

Of course they are and they must be followed accordingly, because otherwise you will fail in closing the deal. You have 45 days to find potential replacement properties from the day you close on the relinquished property. The entire period during which you have to close and acquire the replacement property is of 180 days. Keep in mind that those 45 days are included in this 180-day period (as this is one of the greatest mistakes real estate investors make when it comes to 1031 exchanges).

What are the most common restrains investors face when identifying replacement properties?

First and foremost, you must provide “unambiguous descriptions” of the replacement properties you have found and this must be done before the 45th day. It is recommended you identify a number of three potential replacement properties, just to be sure, and to have the intent of buying at least one of them.

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