A 1031 exchange is an effective strategy for trading investment properties while deferring the capital gains tax you would normally pay. It’s a smart move to make for your real estate transactions, but make sure you don’t open yourself up to errors while doing it. Read below to learn the common mistakes to avoid with a 1031 exchange.
Closing Your Sale Before Setting Up the Exchange
One common mistake people make with a 1031 exchange, also known as a like kind exchange, is that they close the sale of the property before setting up the exchange. Although you can set it up right before you close the sale, it will be taxable if you execute the exchange documents afterward. Make sure you follow the proper procedure and do it right.
Not Identifying a Replacement Property on Time
Another common mistake to avoid with a 1031 exchange is not identifying your replacement property on time. After your relinquished property closes, you have only 45 calendar days to name the replacement. Once that time elapses, you won’t be able to identify one for the tax deferral, and you cannot get an extension.
Hiring an Unreliable Intermediary
When conducting a 1031 exchange, it’s also essential to hire a qualified intermediary you can trust. The federal and most state governments do not regulate these custodians who hold your funds.
Do research on your intermediary and make sure they seem reputable. You should also become familiar with the hidden 1031 exchange fees you must pay your intermediary, so you do not get blindsided later in the process.
Not Buying a Property of Equal Value
If you want to defer all of the taxes, you need to buy a new property equal to or greater than the value of the property you are selling. You will not get a full deferral if you purchase one of a lesser value. Select a property with at least as much value as you are selling, or you will not enjoy the full benefits.
With these tips, you will be better prepared to prevent mistakes a 1031 exchange transaction. Otherwise, you may find yourself making a blunder that you will regret on a personal and financial level.
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