1031 MN

What Constitutes A Like Kind Exchange Vs An Outright Sale?

If you are one of the many people who have caught on to the fact that there is a lot of money to be made in real estate, then you are already on the right track. You can really build your wealth by purchasing and selling real estate, especially if you do it right and take advantages of systems and tax breaks out there. If you are interested in selling one of your investment properties and then purchasing another, you want to make sure that you are looking into like kind exchanges.

Section 1031 from the IRS allows you to defer your taxes on the proceeds from the property you sell if you are taking all of those proceeds and investing them into like kind exchanges. This means that you are taking the money you gain and purchasing one or more properties with it. The thing about the deferred exchange though is that you have to be careful to make sure that you are playing by the rules. There are a lot of stipulations, rules and time lines that have to be paid attention to.

The first thing you need to understand is just what exactly the like kind exchange is. First, figure out what the fair market value is of the investment property that you are selling. Whatever that fair market value is, the new property or properties have to be of the same value or greater. This means that you could have a fair market value of $50,000 on the property you are selling and have a total fair market value of anything above that on the property or properties that you are exchanging it for.

The properties, both the one you are selling and the one you are purchasing must be investment properties that are not and will not be your place of residence to be considered for qualification of the like kind exchanges. These can be rental properties though, which means others can live in these properties, just not you.

The like kind exchanges can be single family homes, multi-family homes, parcels of land, apartment complexes or any combination of these. You just want to make sure that the property or properties that you are investing in meet the strict qualifications for the like kind exchange. To make sure that there are not any problems, you will want to review the IRS site, consult with a real estate attorney and find a quality exchange company that will help you through the process.

The quality exchange company is the neutral third party that holds onto the proceeds from the property you sell and then sends it to the appropriate places when you finally purchase the investment properties that you are using as the exchange. You cannot complete a 1031 like exchange unless you use a quality exchange company.

One thing that can mess up the like kind exchanges is waiting until the last minute to get everything done. You will want to make sure that you are moving as fast as possible, especially since the 1031 exchange regulations do not give people a lot of time. Even if you just one to exchange your property with one other, you might want to find two or three that you would not mind investing in.

This is because you have only forty five days from the date of the sale of the property you are getting rid of to name the properties you are interested in obtaining. You then have a total of one hundred and eighty days to complete all transactions, including the transaction of purchasing the new property. If you name only one property during your initial forty five days and that sale falls through because of something on the other’s person’s end, you are out your chance to take advantage of the like kind exchange and the tax deferment that comes with that.

But, if you have two or three properties named, then you can move on to another on your list should the first one you are interested in fall through. Since you have a limited amount of time, you have to make sure that you are planning ahead and preparing for complications that could arise. This is the only way to really ensure that you are going to be able to take full advantage of the deferred exchange and gain all of the tax deferment benefits.

In order to make sure that everything runs smoothly for you, you will want to make sure that you are doing as much research on the like kind exchanges as possible, before you decide to go for it. Learn from the mistakes of others and gain helpful tips and insider tricks from those who have been through the like kind exchange before. The more you know and the more you are prepared for, the easier it will all go for you. It might seem a little complicated at first but once you go through the process once you will see that there really is not much to it once you know the rules of the game. It will continue to get easier and easier each time you decide to take advantage of the 1031 exchange.