Expensive 1031 Tax Mistakes-Part 2

In a recent post, I covered the first five most dangerous mistakes you can make when it comes to taxes and 1031 exchanges. Now we’re covering the remaining five. Make sure you’re educated before moving forward with a like-kind exchange. 

Mistake #6: Assuming Tax Elimination When done properly, a 1031 exchange can help you minimize your tax burden in terms of capital gains. That being said, you should not expect that it will eliminate taxes entirely if you don’t complete the exchange properly. If the exchange actually changes the income to ordinary income as opposed to capital gains, you could be looking at a higher tax rate in addition to other taxes. 

Mistake #7: Letting the Clock Run Out You only have a strict 45 day period in which to identify a replacement property after you have closed on the first property. This is why choosing when to move forward is such an important milestone. If you don’t have the property ready to be purchased or if it gets snatched up by another person, then you’re out of luck and may be unable to complete your exchange successfully. Make sure you don’t move forward with an exchange until you’re truly ready to move quickly. 

Mistake #8: Bad Tax Planning You need to think about present, past, and future tax planning concerns when conducting a 1031 exchange. It’s not a bad idea to consult with your tax professional in addition to your qualified intermediary to ensure you understand the ramifications of engaging in an exchange. This should be done each time you’re thinking about moving forward with an exchange. 

Mistake #9: Misunderstanding the Rules About Like-Kind If you’re exchanging a commercial building, you do not have to necessarily replace it with another commercial building of the exact same size and value. You just need to exchange like-kind property within the parameters of a 1031. It’s good to work with your qualified intermediary to ensure you understand this and to get some counsel on whether the property you’re considering qualifies. 

Mistake #10: Not Realizing What Can and Cannot Be Included This is not a chance for you to use that second vacation home in a 1031 exchange, unless that home is being used for business purposes. And don’t assume that a home rented briefly each year is okay if you are also using it for your own residence- a home has to be largely rented out to others in order to qualify. Read through specifics before moving forward so you don’t get disappointed or disqualified. - See more at: http://www.qualifiedintermediary.net/expensive-103...