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You have 45 days to exchange “substantially the same property” identified by the taxpayer.Īnd finally, the replacement property must be of equal or greater value when deeded back to the taxpayer. You have 180 days to spend the exchange equity on down payments or completed payments for improvements on the new property. Similar to the other types of 1031 exchanges, you still have time requirements you need to follow.
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With this type of 1099 exchange, you use the profits from your last investment property to make improvements to a new one. The last option is the construction or improvement exchange. I had a good opportunity to do it once, but the cost made it not worth doing the deal. It’s critical to note however, that the cost to do a reverse exchange is literally about 8x higher due to the far greater deal of paperwork needed. You have 45 days to decide which property you’re going to sell, and you have 135 days to sell it. However, you need cash for the whole deal. With a reverse exchange, you buy your new property before relinquishing your previous investment property. So, for example, you can sell one more expensive property and buy four cheaper properties. The new property (or combination of new properties) must be of equal or greater vale than the sold property. You have 45 days to find a new property to invest in, and 180 to close the deal before you’ll owe taxes on the profit of your sale. Since this type of exchange gives you more time and has more flexibility, it’s the most common type of 1031 exchange people use.Įven still, you do have a time constraint. The second type of like property is called a delayed exchange. This gives you an idea of what all is involved. Below are samples of the first pages of the sale docs (relinquished property) and the purchase docs (replacement property), from one of our exchanges. But it’s also possible to do a three-party exchange with a compliant third party or to work through an intermediary.ĭespite all the rules, in the end the exchange is basically a set of documents. Because of this, it most often happens with a direct deed swap.
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The timing has to be very exact for you to use this 1031 exchange. The relinquished property and the new property must close on the same day. This occurs when you exchange one property directly for another. The first like property exchange is a simultaneous exchange. Keep in mind that each has to be completed on a certain timeline and also meet specific financial criteria. That said, there are four different kinds of like property exchange options. In its original conception, the 1031 exchange applied when one property was directly swapped for another.įor example, you can use the exchange when selling one rental property and buying another of equal or greater value. One big part of the 1031 exchange is you need to “exchange” an existing property for a “like” property. But honestly by doing that, the process becomes pretty darn easy! What is a “Like-Kind Exchange”? So you’ll need to work with a firm that handles the process for you. It’s important to note that your taxes are deferred, (similar to the way they are in many retirement accounts), not completely wiped out.Ī 1031 exchange is a bit of complicated process, even for professionals. If you follow the rules, you’ll save boo koo bucks because you won’t have to pay any taxes on the profit (for now). It’s also described as a “like-kind exchange.” It allows you to roll your profits from one investment property into the purchase of another like-kind property. The timeline is the schedule you have to abide by to execute the exchange correctly. The 1031 exchange is a tax deferment device, and it needs to be a part of your real estate investment strategy.
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So how does it work? Here’s everything you need to know about the 1031 tax exchange, from an easy to understand definition, to the timeline, to how you can actually use it. When you sell an investment property at a profit, you typically have to pay taxes of up to 20-35% (depending on what state you live in) on that profit.īut with the 1031 exchange, you can take all of those taxes you would have paid, and invest them in another property…amazing! A 1031 exchange timeline is worth investigating and enduring the hassle of abiding by.