The main objective of an investor is to maximize his/her returns. And one of the best ways to reduce risks and maximize returns is investing in the real estate industry. However, if you have decided to cash in on a particular property, you’ll be subjected to capital gain taxes. To maximize that investment portfolio of yours, consider doing a 1031 exchange. With a 1031 exchange, you have a great way of deferring these taxes and increasing that investment portfolio of yours. Besides helping you, this exchange is good for the economy. Keep reading to find out how 1031 exchange is done.
Understand the Meaning of 1031 Exchange
The first step is to familiarize yourself with the meaning of the 1031 exchange. According to experts, the 1031 exchange allows you to defer those capital gains taxes when you replace your property. This means that you won’t pay those taxes after replacing it with a new property. However, the property should be a like-kind based property. The purpose of the 1031 exchange is to eliminate tax burdens—which can help businesses grow without any issues. For instance, if you erect to sell a smaller warehouse, storage facility, etc. and replace it for a larger one, you won’t be subjected to taxes. As a business owner, you can defer capital gain taxes when you sell your property and replace it with another property.
Know The Deadlines
When it comes to doing 1031 exchange, nothing takes center stage quite like deadlines. So, learn and memorize them. To defer taxes, you must follow strict deadlines set by the IRS. In most cases, the process must be completed within 45 calendar days. This means that you have around 45 days to locate a replacement property. Further, the sale must be concluded within 180 days.
Have a Good Team
The 1031 exchange involves several moving parts. The transaction can be complex and highly demanding. That’s why you should have a team of experts to help you execute these transactions in the most effective manner. First, get a qualified and highly proficient intermediary. This company will be responsible for holding the proceeds from the sale of your property. It will also help you achieve a smooth transaction. So, use a qualified 1031b exchange intermediary company.
Design a Smart Strategy
For maximum benefits from the 1031 exchange, you need to be smart. Being a smart investor starts with having a good strategy. For instance, you may decide to go for the Delaware Statutory Trust—it will help you when it comes to investing the difference. In a nutshell, you need to have clear investment goals.
Additional Tips
The following are additional tips and tricks you should know:
- Determine who will purchase your replacement property
- It’s advisable to have plan A and B
- Before going into the transaction, sort out your financing
- Familiarize yourself with the new rules
The Bottom-Line
Before rushing into the 1031 exchange, it’s important to learn the basics. In particular, knowing how to do the 1031 exchange is performed is important. The above guide contains tips and tricks for getting the most out of the 1031 exchange.
