Real Estate

Watch out for these 1031 exchange nuances that could block your deal.

After about a year Going through a 1031 exchange in person. the process, I can say that. I am one now. Expert in everything 1031And you can trust me.

Many savvy investors know the basic requirements for a successful 1031 exchange, which, when done correctly, allow you to defer significantly. Capital Gains Tax. But when you in fact Dig into the process itself, you to begin Realize that there’s a lot more under the hood than you first saw in blushing. Here are some oft-overlooked subtleties to keep in mind.

What Most People Know About 1031 Exchanges

  • Your new property needs to be up to par. more Price from the property you are selling.
  • You have 45 days to identify the new property.
  • You have 180 days to close on this new property.

But wait, there’s more.

Must be included in your selling price. mortgage

This is a rule that many people forget.. If you’re selling a $500,000 property but still owe $200,000 on your mortgage, you’ll need to exchange it for a property worth at least $500,000, which means you’ll need a new one. A minimum $200,000 mortgage will also be required on the property.

Take care of the bot

If you sell your first property for $500,000 and you Buy your exchange property for $400,000, that $100,000 delta is called the “boot” and you can expect to pay capital gains on it. Do not do this. Make sure The property you purchased is the same or more value from which you are selling..

Your new property must be in the US.

No foreign Côte d’Azur purchases, at least for this exchange.

You must use a The third Party

When you sell your first property, All income must be held Escrow From a third party. If you touch them in any way, even for a day, you lose all taxes. Benefit.

You can buy multiple. Properties

you need to Identify three alternative properties within 45 days of closing on your initial property. But there are two exceptions:

1. You can. in fact Identify no more than three alternative properties unless the total value of all your identified properties exceeds 200% of the sale price of your original property.

2. You can identify as many properties as you want, in the end, you get at least 95% of their total value. (Your broker helps you legally record your target properties.)

When you die, your capital is also due.

Yes, tax benefit Technically delayedBut death protects your children from that. Have to pay Any deferred capital gains tax by you. They inherit the property, and your deferred liability disappears.

Final thoughts

When all is said and done, a 1031 is still a great way to preserve your hard-earned equity and kick taxes down the road. But make sure you investigate all the rules and understand all the back and forth loopholes. One wrong move and you lose all your gains!

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Note via BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.


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