Ray Martin of The Martin Agency recommends first finding an experienced tax adviser and meeting with a 1031 exchange intermediary. Investors should identify multiple properties as a hedge in case one of the deals falls through. If the 45th day is approaching and an investor hasn’t found a property to their liking, Ray Martin recommends stashing the money in a tenant-in-common investment (TIC). This means investors would be co-owners with numerous other investors in a property. While TICs can be harder to sell, they allot the investor more time to find a property to their liking.
Timeline: An investor looking to complete a 1031 exchange has 45 days from the sale of their property to identify an exchange property of equal or greater value. Once found, the investor has 180 days from the day of the sale to acquire the property.
Like-Kind Property: The law states that an investor must acquire a “like-kind” property to the one they are selling, but this doesn’t mean they can’t trade up.
“Like-kind means investment property for investment property,” explains Martin. “So you can sell a 2-unit apartment building and buy a 6-unit apartment building.”
Equal or Greater Debt & Equity: An investor needs to purchase a property that is equal or greater in value to the combined equity and debt of the property they sold. So if an exchanger sells a property for $500,000 in which $250,000 was equity and $250,000 was debt, they need to purchase $500,000 or more worth of property.
Exchange Property Must Be An Investment: Investors cannot do a 1031 Exchange where they sell their primary residence and purchase an investment property. Exchange properties must be held for investment or business purposes.
However, Martin notes that there is an interesting workaround where the investor purchases a multi-unit property and then moves into one of the units. After two years, the investor could sell the property for a lowered capital gains tax, given that it is now their private residence.
Intermediary Needed: An exchanger cannot receive cash from the sale of their property, as this would trigger a taxable event. Instead, the IRS states that a “Qualified Intermediary” (QI) must facilitate the transaction. The QI is a 3rd party — usually an escrow company — that holds the proceeds from the sale of an investment property and purchases the exchange property on the investor’s behalf.
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