Wednesday, February 24, 2021

Strategy: 1031 Exchange for Real Estate

Recently, in a chat with a friend that also owns rental property, she came to the realization that she might expand her thinking outside of her original plan. She realized that if she sold her current rental property and purchased a multiunit dwelling, she would be in an even better position than she is currently.  I briefly mentioned that a transaction of this sort could be performed without paying taxes on the sale of the original rental property by way of a 1031 exchange.

Let's dive into a bit about how that works.  First, it's important to know that there are multiple types of 1031 exchanges.  A Delayed 1031 Exchange is the most common, and the one we'll explore.  There are four basic steps to the process of this transaction.

Sell the Original Property

This step is pretty straightforward.  The one tricky part is that you have to decide that you're doing a 1031 exchange before the closing of the sale and identify a qualified intermediary.   The timing of a 1031 exchange is delicate and once the sale of the original property is complete, the timer has started!

Find a Qualified Intermediary

Once your property is under contract, you should be sure you identify a qualified intermediary.  You can't do a 1031 exchange otherwise.  A qualified intermediary is a company that holds the funds from the sale of the original property and is responsible for assisting you with the related paperwork.  They will also hold you to a timeline.  

Identify a New Property Within 45 Days

You will have 45 days from the sale of your original property to identify up to three replacement properties.  As long as you stick to the allotted three, you may identify properties of any value above the original sales price that you like, but if you identify a fourth property, some other special rules kick in.  So, shopper beware!  

Close Within 180 Days

There is a second timeline the qualified intermediary will hold you to, and that's the purchase date.  You must close on the sale of the new property (or properties) within 180 days of the sale of the original property.   If any of the applicable timelines are not observed, your 1031 exchange fails.  The worst-case scenario is that you end up paying taxes on the sale of the original property.  

Inspired action is at the very center of a successful law of attraction practice.  Knowledge and imagination often provide the best fuel for inspired action.  Without a little knowledge, how do we know what experiences to try on through imagining?  Continuing to learn and grow our knowledge base gives us something to get inspired about.  Now, whether or not my friend will pursue a 1031 exchange remains to be seen.  If she had never been educated about a 1031 exchange in the first place, she certainly wouldn't be inspired to pursue one.  Now that she knows, she can try it on through research, meditation, imagining, and eventually discover for herself whether or not it might be right for her.

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