How to buy like kind exchange property

One of the most common questions when going through a 1031 exchange has to do with identifying like kind property. Many people have misunderstandings about what it means to say that a property is of like kind. Like kind exchanges are truly one of the best ways to make to obtain tax benefits for an investor. A problem with this is that you must be able to keep trading up on your property values in order to avoid taxation.

As an example, if you initially bought a property for $100,000 and its value has increased to $250,000, you would otherwise be seen as having a $150,000 gain if you sell this property. If you instead exchange it for another property worth $100,000, the entire $150,000 in gain is taxable. This is why any amount not reinvested must be considered carefully because it could be your gain first.

If you don’t feel it makes sense to reinvest all the proceeds in your 1031 exchange, you could be stuck recognizing gain and therefore paying taxes. If you could buy more than one property however, the economics could make this a much easier decision. Under exchange rules there’s no limit on the number of properties that you can exchange. You are limited to identifying properties within 45 days of three properties of any value or any number of properties so long as they do not go beyond the 200% value of the relinquished property.

Under these limits, you could instead replace relinquished property with five to ten $50,000 units since it doesn’t exceed twice the value under the rule above or you can identify three properties each worth $200,000 and still maintain within the limits. Following the rules properly can help you initiate a 1031 exchange and reap the benefits of different capital gains taxes. Being hit with capital gains taxes because you made mistakes in the process of a 1031 exchange could be devastating.

This is why it is essential to identify an experienced qualified intermediary as soon as you believe that you are interested in exchanging property. Your qualified intermediary will accept and apply the funds on your behalf so that you are not seen as receiving any gain. Understanding the timelines associated with a 1031 exchange is the second part of being successful with deferring the taxes. You must be ready to move forward with an exchange after you relinquished an initial property because failing to comply with the IRS guidelines on timing could mean that you would have to pay capital gains taxes anyways. Speak with your qualified intermediary about what you need to know before moving forward with an exchange and what you can do to set yourself up for success. Identifying replacement properties is a key part of the process and it is one that should be approached with careful consideration and care.