As a real estate investor, you are probably looking for all advantages to maximize the ROI. Investing in real estate properties is a perfect way to minimize investment risks and see a positive return over time.
But if you are ready to cash out one of your properties, you will be liable for a capital gain tax. A 1031 exchange is an excellent way to defer the tax and increase the investment portfolio.
These exchanges are important for DST real estate investors and perfect for the general economy. So if you want to have a successful and smooth 1031 exchange, the following are tips from the pros to help you:
1. Choose a Qualified Intermediary (QI)
Technically, you cannot complete an exchange by yourself. You will need to transfer the property you want to sell to a qualified intermediary. They normally hold on proceeds, facilitate the sale, and complete purchase transactions on your behalf.
While IRS allows you to use other types of exchange facilitators, experts suggest that you consider working with an experienced QI to ascertain that the exchange is done efficiently and properly.
2. Strategize Before You Relinquish
You can wake up one morning and decide to exchange your rental property for another so as to defer the tax burden on profit or proceeds.
Qualified intermediaries don’t have a problem with this, but before plotting to sell that property, ensure you determine what kind of asset you want to take in its place.
As a matter of fact, it would be a great idea if you get your ideal replacement asset before relinquishing yours. Winging it when replacing properties can play havoc when it comes to the following:
• Investment tactics• Portfolio
3.Sign the Exchange Documents before Closing any Deal
With the 1031 exchange rules, you can sell your property to buyers and get a replacement within 180 days from another seller.
The seller must sign the documents before or on the date on which they close the sale of a relinquished property.Exchange documents may include an agreement, which was entered into if the real estate investor or seller chooses to work with an intermediary.
4. Ensure Exchange Asset is Equal or Have a Greater Value
This rule is normally misunderstood, but in the real sense, it’s somehow easy. The value of replacement properties should be greater or equal to the aggregate value of a relinquished property.
The costs associated with attorney fees, escrow, title, and brokerage fees should also be less. For instance, if the property is going for $2,000,000 with $100,000 of sale costs, the replacement property should have a value greater or equal to 1,900,000.Notably, among the costs, which can’t be deducted when calculating the ‘greater or equal value is the mortgage or loan payoff.
Final Remarks!
If you are looking to sell a business property or an investment, 1031 exchanges are a perfect option to increase cash flow by deferring taxes.
In other words, 1031 exchanges enable taxpayers to sell real estate properties and reinvest the money back in similar ‘like-kind’ properties, which are greater or equal in value. Provided you follow IRS rules diligently, capital gains on the sale of properties can get postponed.
I'm a professional blogger and author.