The 1031 exchange for real estate investors is a legal, financial procedure of Section 1031 of the Internal Revenue Code, also called the like-kind exchange.
It is mainly about getting a chance on deferring capital gains tax if you, as an investor, sell off your property and buy another feature that is much like the one you just sold. It’s not a check and deed exchange kind of situation but rather involves an intermediary who holds funds from the seller to the buyer as the process unfolds. The intermediary must be qualified and must not have a prior relationship with either party before the property exchange.
Among the many reasons you would want to consider this is that you can access better returns. Courtesy of the new properties, getting yourself a managed property rather than managing one personally or even when consolidating many features into one for easier management. Due to their high venture requirement, luxury homes fall entirely into the bracket.
Since the 1031 exchange rate is highly based on depreciation, it is wise to have your depreciation calculations on a check. Since the bracket for like-kind properties is substantial and diversified, you can get commercial buildings for land or residential land.
However, you cannot exchange real estate for anything else, like cars or a painting.
Here are the criteria you are supposed to meet.
First, the property you want should either be equal or of higher value than your sell-off property. The entire process takes at most 180 days.
You also need to know the three rules.
The first is the three-property rule that requires you to have options of three potential properties without considering their market value.
The second is the 200% that requires you to identify as many properties as possible, provided their cumulative value is below 200% of the property you just sold.
The last one, the 95% rule, is the last one that requires you to find many properties whose value is not above 95% of what its total would be.
The exchanges vary but usually take place in five stages, from the setting of the sale date to the completion of the replacement property’s purchase.
In a build-to-suit exchange, the replacement property can be renovated or even constructed based on the investor’s needs. Replacement property can be acquired before the selling property is exchanged in a scenario called a reverse exchange.
Ensure that you take care of your financial interests so that only the required fees exchange hands together with the exchange funds during the entire process.