1031 Exchange/Strategic Planning is the Key

The basic requirements of a 1031 Tax Deferred Exchange appear simple enough. From the time you close escrow on an income property you own; you have 45 days to identify either 3 properties you may consider purchasing, or any number of properties that all add up to under 200% of the value of your relinquished property. You have to purchase a new property (ties) of equal or greater value, and you have to replace the existing debt. You can exchange any property you own with the exception of your personal residence; and the IRS “like kind “definition extends to any category of property that is held for investment. You can sell land and purchase a retail center; or apartments or an office building etc. Almost any property qualifies as long as it isn’t your personal residence.

You then have 180 days from the time you “close escrow” on your relinquished property to complete your new purchase to comply with the IRS Rules and Regulations for a tax deferred exchange.

Simple enough? Well, as my accountant consultant once said “the devil is in the details “and I will highlight just a few of the challenges associated with the existing 1031/Tax Deferred Exchange time perimeters.

The 45 days requirement can be a “quagmire’ of concern because it (often) isn’t adequate time to perform a thorough due diligence inspection of any new purchase. Often salient facts about a property are not discovered until deep into the Due Diligence Process and the 45 day ID period has expired. Remember that you must purchase a property you identified within the 45 day period and you must close on one of those properties within the next 135 days. This is a real concern and the process can be under estimated by even by the most experienced investor.

Title/ Vesting can be another issue. Often a property has been held for years under a Family‘s LLC or a group of investors that own it as one entity. If you/your group are planning to sell a long held asset; it is imperative that you all decide to exchange at the time of the sale; or change the vesting well ahead of the sale. If you own properties with a partner/partnership; make sure you own them as Tenants-in-Common, so you are able to exchange out your interest on your own behalf.

I think you get where this is going. There are almost no wealth generating plans as powerful and effective as the 1031 Exchange Process as a way to accumulate wealth. The potential to continue to build equity exponentially through a long range planning is unparalleled.

The thing to be aware of is the importance of a well thought out strategy developed in advance of marketing your property; getting a real sense of where you want to reposition your equity, and understanding your goals in selling. You may decide to do a reverse exchange; in spite of the added expense. Knowing and uncovering your options can reap financial rewards if you take the time to educate yourself and identify what you want to achieve.

A well thought out plan; developed in advance of your initial sale may save you hours of (last minute) anguish. With advanced planning; you can position your estate for years of prudent appreciation and you can “Swap ‘til you Drop”. Got you thinking? Contact us; your investment specialists and put our experience to work for you.  Annette Cooper/Senior Investment Advisor.

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