Real estate investment is not something to take at face value. There are different aspects you will need to consider when investing in property. One of the most crucial is the taxes you will be required to pay. The tax burden associated with property investment has marred many a dream of property investors.
You, however, have an option of deferring the taxes you will be obligated to pay after the sale of your property. To guarantee you handle your transaction well, you should get an expert who also provide 1031 exchange services. They will be able to guide you through the transaction right from the start.
You are allowed to defer the taxes in a 1031 exchange if you use the proceeds from your sale to invest in another property with an equal or higher value to the one you sold. You will also need to maintain the same mortgage as your previous one or get a higher amount.
There are different timelines for investing in a like-kind exchange property. The following are these options.
Simultaneous Exchange
This is the simplest 1031 timelines to work with. In a simultaneous 1031 exchange, you will close on your relinquished and replacement properties on the same day. The exchange works for both two and three-party swaps.
In a two-party exchange, a seller and buyer will swap their properties’ deeds at the closing of their deal while in a three-party exchange, the investors will have a qualified intermediary to structure the transaction. Although it sounds easy enough, without a qualified intermediary, a simultaneous exchange will be frustrating.
Delayed Exchange
This marks the most common 1031 exchange type. In the exchange, you as the property seller will relinquish your rights to the property’s ownership before you acquire replacement property.
You will need a qualified intermediary to guide you through the transaction and hold your funds in an escrow account for a maximum of 180 days. You will have up to 45 days to get your replacement property after the sale of your relinquished one and 180 days to close the deal.
You can identify three properties at most for your replacement so long as you pick one before the period elapses.
Reverse Exchange
This occurs when you acquire replacement property before the identification of a relinquished property. The replacement property is obtained using an exchange accommodation titleholder. In essence, the exchange works like a ‘buy first then pay later’ kind of transaction.
Reverse 1031 exchanges are however tricky, and most banks will not offer loans for this. If you do not close the deal within 180 days of acquiring the replacement property, the agreement is forfeited.
Improvement Exchange
Here you will use some of your exchange equity to improve your replacement property. To do this, your property should be in a qualified intermediary’s hands for what is left of your 180-day period. The equity should be spent on your constructions within the 180-day time frame.
Most people think that a 1031 exchange is as simple as identifying a replacement property — but it isn’t. Any mistakes with the exchanges will mar your chances of benefiting from tax deferral. Get a qualified intermediary to guide you and guarantee a successful transaction.
