Delayed exchanges under Section 1031 are highly popular among investors. As the name implies, there’s a time delay between the investor relinquishing their property and buying a second one. If you are considering a delayed 1031 exchange but don’t really know how to crack it, here are the steps.
The property owner seeking an exchange on his asset should first acquire a Qualified Intermediary. The party will facilitate the sale by drafting up an exchange agreement and tasking the closing agent to complete procedures on their end. The property will be directly-deeded to the buyer, but the proceeds will be temporarily held up until the owner of the now-relinquished property finds a replacement property no later than 45 days after the close.
For the identification, the exchanger will need to abide by certain rules. The Three-Property Rule allows them to pick three open properties regardless of fair market value. The 200 Percent Rule takes into account any number of properties whose aggregate fair market value shouldn’t be equal to twice their fair market value. The 95 Percent Rule applies to any number of properties regardless of fair market value as long as the person acquires 95% of the properties’ value. The replacement property itself should be secured within 180 days.
After years of managing a residential real estate, landlords may find themselves exhausted with the whole process. Dealing with tenants, settling conflicts, preserving the grandeur of the structure – all of these can cause a lot of stress to entrepreneurs, especially to those who have seen better days. If you are one of the businessmen who would just like to take things easy, then swapping your properties with hassle-free ones can be the solution to your problems.
Entrepreneurs who have grown tired of their properties can do a 1031 exchange, which is a tax-deferred exchange that allows taxpayers to sell business property, income, or even investment, and replace it with a like-kind property. For instance, if you are a proprietor of an apartment building, you can choose to swap it with an industrial building if you feel like treading on a new business path or if you think it will be easier for you to handle.
Aside from allowing you to don a new hat as a corporate leader, a 1031 exchange is a wise tax and investment strategy that will help you save money to fund your other businesses or for safekeeping. However, there is a catch – the capital gains on the sale of the property will only be deferred or postponed if you follow IRS rules to the letter. As long as you are doing your job as a responsible taxpayer, then the odds will stay in your favor.