1031 MN

What are the Mechanics of a 1031 Exchange-How Does it Work?

If you have ever wondered just how it was that real estate investors can go from one property to another without looking as though they just paid thousands of dollars in taxes? The reason they are able to move from one property to the next is simply because they are taking advantage of a little known secret called the IRS 1031 exchange. Without taking advantage of this exchange, someone would have to pay the typical taxes on the sale of a property. Then, they would have to take what is left and try to invest in another property. This can be extremely hard to do but luckily, there is an easier way.

The 1031 exchanges are easy enough to understand, in terms of the basic concept. The basic concept is that the real estate investor is selling one property. Instead of paying taxes on that sale, the investor wants to purchase another investment property. The equity from the sale of the first property is used to invest in another property that is equal to or greater than the first in terms of value. When the money from the equity in the first home is used to purchase the second home, this is the 1031 exchange. Taxes are deferred. Wealth is built. Futures are secured.

As you can easily see, the basics, or the skeleton of the plan, is easy enough to understand. Understanding all of the rules, regulations, guidelines and timeframes is a little different. There are many things that could come up which could completely foil your plan to take advantage of the 1031 exchange. These are just simple little mistakes that could literally cost you thousands of dollars. To make sure that this is not something you are faced with, you want to make sure that you are studying the rules and guidelines of the 1031 exchanges as though you are studying for the bar exam.

The first thing you will want to realize is that there are very tight guidelines that are involved with the 1031 exchange. You want to make sure that you are extremely clear on what those guidelines involve so that you are not making any costly mistakes. You will quickly see that the timelines are the most important. The time lines for the 1031 exchange actually involve two parts.

When you first sell your investment property, you will have forty five days to identify the replacement property that you want to purchasing. This forty five days starts from the sale date and it is forty five days exactly. There are no extensions and certainly no exceptions. The holidays and weekend count as part of the forty five days so you are not just looking at business days when you are counting down.

Then, you only have a total of one hundred and eighty days from the date of the first sale to complete the acquisition of the second property. In some cases, if the investor’s IRS yearly tax due date is creeping up sooner than the one hundred and eighty days, the investor will only have until then to finish everything up. So whichever comes first, the one hundred and eighty days or the federal tax return due date, that is when everything must be wrapped up and completed in order to take advantage of the 1031 exchanges.

It is also important to make sure that you understand what types of properties qualify for the 1031 exchange and which properties do not. By making sure that you completely understand the rules for the 1031 exchanges before you jump in head first, you will ensure that your attempt at saving a substantial amount in tax money right now will be a success. You need to first realize that since the 1031 were built for the purpose of helping investors, the properties that you are selling and purchasing must be investment properties. These are not going to be properties that you live in. They can be rentals and properties that you are simply flipping.

The properties that qualify for the 1031 exchange also have to be “equals”. The property that you are purchasing must be of an equal value or greater than the one you sold. Basically, you want to make sure that you are “trading up” in order to qualify for the tax breaks that come from using the 1031 exchanges.

Since there is a lot that has to be done in a very little amount of time, it is important to make sure that you are getting as much help as possible. If you have a real estate attorney or an accountant, that is great. They will be able to help you through the process. Make sure that you are not leaving it all in the hands of those you have hired. You want to make sure that you are fully learning about the 1031 exchange so that you can make sure that everything is falling together nicely for you. Even though there are a few rules and regulations you have to deal with, the tax deferment advantage that you receive is well worth it. You can finally invest in the real estate that is going to set up your financial security for the future.