A successful replacement property and deliver life-lasting financial benefits for you and your estate – as long as it’s selected properly.
But first, here are a few replacement rules you must be aware of.
Property Value: An investor must purchase a replacement property of equal or greater value to the sale price of their relinquished property in order to defer 100% of the taxes due on the sale.
However, there is a limit as to how much or how many properties they can ID. As a result, the investor can choose between three rules to ID property or properties:
Depending on the options an investor is considering for replacement property, they will choose the most appropriate rule for their situation.
If an investor happens to know exactly what replacement property they want to purchase, there will still be a rule that applies to them.
A common pitfall that gets investors into trouble is identifying too many properties in an attempt to get themselves more options.
To help ensure success… decide what you want to do as soon as you can, and begin closing on the properties you select. This means understanding early on what your options are – and what replacement property solution is ideal for you.
Identifying a successful replacement property solution.
Although replacement properties must be ‘like kind’ to be eligible, the broad definition of what qualifies as a ‘like kind’ property works in your favor. In this canse, you simply need to find a replacement property that you will hold for business or investment use.
In other words, as long as it is used for this purpose, and not intended for personal use… any type of property can be exchanged for any other type of property.
For instance… if you owned farmland… you could sell that real estate and reinvest the proceeds into a series of income producing office buildings. Since you have no plans to use the office buildings for personal use, they are eligible as a ‘like kind’ replacement property.
Once a property has been selected for identification the following steps apply:
Once properties have been identified, and the 45 day window closes, the investor has a remaining 135 days to buy one or all of the properties ID’d.
An investor can always buy more property than they identified, but to qualify for an exchange they must replace the sale price of the relinquished property with a property that they ID’d.
Many investors are lulled into thinking that they can manage the ID rules themselves. The IRS is very strict with these rules and if not followed properly, an investor risks a failed exchange.
To ensure that you don’t risk failing to qualify hire an experienced qualified intermediary (QI) to help navigate your exchange. QIs typically charge a nominal fee for their services and more than make up for it with their expertise.
To learn more about this topic book a virtual meeting with one of our highly experienced 1031 exchanges experts today!
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