What 1031 exchange rules need to be addressed if you are implementing a tax-deferment strategy? As the owner of commercial properties, it is essential that you understand the rules and regulations that manage these investments. Staying within the lines can help you reduce your tax burden while building investment wealth simultaneously.
What are the 1031 Exchange Rules?
Here is an overview of the rules that regulate the way 1031 exchanges can be completed:
- Similar Exchange: When the original property is replaced with a different property, it is essential that the exchange is considered “like-kind” or similar. For example, you might exchange a shopping center for business development or raw land for a hotel.
- Timing the Transactions: While a simultaneous exchange is ideal to minimize the time frame of the deal, most people don’t have the arrangements for both transactions to occur on the same day. Instead, the replacement property needs to be identified in writing within 45 days of when the original property is sold. Then, the replacement property needs to be purchased within 180 days of the original sale.
- Comparable Equity: When the equity is rolled into the new property, it is important that this replacement has an equal or higher price compared to the original property. If the new property is priced lower than the original, then the difference in profit might be calculated for capital gains.
- Title Name: According to the 1031 exchange rules, the titles on the original and replacement properties need to have the same owner name. If you own property under an LLC, then that LLC name needs to be on the title of the new property as well.
- Transaction Facilitator: There are many instances where the funds are kept in escrow while the replacement property is selected. For best results, a transaction facilitator should be used to ensure that all guidelines and rules are followed during every step of the process.
- Non-Qualifying Properties: 1031 exchanges can be used for a variety of properties. But there are a few circumstances that don’t meet the requirements. Examples of properties that don’t qualify include personal residence or vacation homes, bonds, partnership interests, second homes, inventory properties, securities, stock-in-trade, and more.
- Location: If the original property is located in the United States, then the like-kind exchange needs to be located in the country as well. On the other hand, this exchange can be completed on international properties. But the original property and replacement property must both be located abroad.
Who Should I call for Commercial Investment Advice?
There’s no need to stress about capital gains taxes when you are using the right investment strategy. Most novice or intermediate investors are still learning about their options, which is why it is valuable to lean on the experience of an expert in the industry.
When you are ready for more information about 1031 exchange rules, then it is time to talk to our team. First National Realty Partners is here to help with your commercial investment strategy. Call us any time to learn more about the real estate investment opportunities that are available.