Overcoming Key Challenges with a 1031 Exchange

A 1031 exchange also refers to situations in which like kind property is exchanged for purchasing other like kind property. It is referred to as a 1031 exchange because this is outlined under the Internal Revenue Service code with the number 1031. This code specifies that when one piece of real estate property is sold, there is no gain or loss recognized for the purposes of taxes if the profits from that sale are immediately invested in a like kind property of equal or greater value. This is one way that an investor can defer paying taxes on the sale of one property until a time period down the road.

There are specific conditions under which a 1031 exchange must be carried out, and it is important to understand the most common challenges associated with a 1031 exchange. One of the most difficult aspects of having a 1031 exchange work is identifying the new investment property within a 45-day period. It is essential to identify this new property within 45 days after selling the first property so that you can capitalize on the deferred taxes. Once you have found the replacement property, the next challenge is in identifying the extra capital needed to complete a 1031 exchange. Knowing what to expect and hiring the right qualified intermediary from the outset of your transaction can be critical for making this process easier.

When done properly, a 1031 exchange can be an exciting experience as a real estate investor that also allows you to defer taxes until a time period down the road. Many individuals interested in real estate investment get involved with one 1031 exchange and then spiral that into future opportunities using 1031 exchanges. Bear in mind that this cannot be done with personal homes but instead can be completed with business property.

There are also specific rules about rental property and how many times per year the home needs to be offered out to renters as opposed to being used by you as a second or vacation home. Make sure to identify a qualified intermediary early on in the process to get your questions answered and have peace of mind about who will be handling the money and receiving and applying funds on your behalf. This person should be a professional who has handled these transactions in the past. Ask for references, if necessary, so you can learn more about the qualified intermediary’s professional background.

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