For investors who have been through the exchange process before, certain parts of a 1031 tax-deferred exchange are pretty straightforward. Most know about the basic 45-day limit for identifying replacement properties and other basics like that, but there are often many more important details regarding these exchanges that even experienced investors may not be completely clear on.
At 1031 Exchange Place, this is what we’re here for. Our comprehensive 1031 exchange services will take you through the entire process and help you save huge sums, often by pointing out a few things that will make the steps simpler. Here are a few areas we can offer advice in.
Consider Who is Acquiring the Replacement
As the taxpayer selling a relinquished property, you must also be the one to buy the replacement. But what if, for instance, your lender requires that you acquire the replacement as a single-asset entity? In this case, you would be able to sell your individual property and acquire a replacement as part of an LLC, which is not considered for tax purposes – as long as you are the only member/owner of the LLC in question.
Sign Documents Before Closing
Make sure you sign exchange documents either on or before the date you close the sale of the property you’re relinquishing. These documents will feature an agreement between you and an intermediary, an assignment of your rights, and a notice to the buyer of this assignment. This allows you to sell the property, then acquire a replacement later from a different party.
Being Careful With Expenses
In certain cases, you can use your profits from the exchange to pay certain related expenses without ruining the exchange. This is the case for things like brokerage commissions, various fees, and transfer taxes.
On the flip side, though, there are certain kinds of expenses here that could trigger your proceeds to become partially taxable. This could happen if you give the buyer credit for things like prepaid rent or security deposits, for instance.
Defer the Full Gain
To completely defer all your taxes, you have to first obtain replacement property that totals equal to or higher value than the property you’re selling. From there, you have to invest all the net equity you gain from this sale into your purchase – if you profit $500,000 over the original cost of a mortgage when you sell, you have to reinvest that entire $500,000.
Consider Safety in Holding
During a 1031 exchange, funds are held in escrow by a third-party intermediary until the replacement property is ready to be acquired. Make sure you learn how these funds are held – this might be in a separate account, an FDIC-insured account, or in securities. Make sure the party acting as the intermediary has a strong reputation as well.
For more tips on making the 1031 exchange process simpler and easier, or to learn about any of our 1031 exchange services, speak to the pros at 1031 Exchange Place today.