What is a 1031 Exchange?
A 1031 exchange is tax strategy that enables investors to leverage more money to defer capital gains tax increasing net worth. Graham Commercial Real Estate offers consulting and advising services before the exchange is made. Our consultants provide all in one stop services to assure imperative deadlines are met and constant communication is kept between Exchangers, Brokers, Lenders, Sellers, Contractors and any other key players.
Before you sell your current investment property
It is important to state that you will be engaging in a 1031 exchange in the sales contract BEFORE closing. Without prior arrangements to conduct a 1031 you will be unable to execute the exchange. You must have a qualified intermediary receive the net proceeds at close and hold the money until you close on the new investment property. If you do end up closing on the property without doing both of these things you will not be able to do a 1031 exchange.
Identify the replacement property
Section 1031 of the IRS code requires that you identify the new replacement property within 45 days following the sale of the relinquished property. As a general rule of thumb, you may identify up to three properties as potential replacement properties. However, it is possible to identify more, subject to certain restrictions. It is important to remember that the IRS had considered tenant in common property to be valid replacement property for the last few years. Our recommendations are to consider multiple tenant in common properties and to identify them as “back up properties”, this ensures a successful 1031 exchange even if your first choice were unable to close. Failure to identify multiple replacement properties is one of the most common reasons an exchange falls through, resulting in having to pay taxes on your capital gains.
Replacement or “Exchange” Asset
You must obtain the replacement property within 180 days following the sale of the relinquished property, this means close and record the deed. The qualified intermediary pays the closing costs and you receive the deed to the replacement property. One stipulation for deferring your taxes with an exchange is that, among other things, the replacement property must be of equal or greater value as the relinquished property. Remember, if you are using a tenants in common (TIC) property as a replacement property make sure you are working with someone that specializes in these deals. A TIC property is one with multiple owner-investors and is normally managed by a professional property management agency.