As many players in the commercial real estate sector wise up to their benefits, 1031 tax-deferred exchanges are increasingly becoming popular. 1031 Exchange Place has also notices the surge. Under section 1031 of the Tax Code, investors in the industry can defer on capital gains after selling a property.
However, there’s a catch — you need to commit 100 percent of the sales proceeds to buying a replacement property to escape the tax. To harness the full benefits of the process and evade the biting capital gains tax, you need to avoid some costly mistakes.
1. Don’t miss the deadlines
Recognizing the benefits that come with the process, the IRS drives you to conclude the deal as quickly as possible. As such, you need to complete the entire process within six months. While that might seem like a long time, you need to remember that an exchange comprises of two different processes.
You must conclude the sale of your current property then buy the replacement property. As with any property deal, the entire process entails a considerable amount of red tape and paperwork. Without the help of skilled professionals, you’re likely to run into a boatload of problems that could lead you to miss the deadline.
2. Don’t show your hand
While there’s nothing illegal about the process, you need to play your cards close to your chest. Otherwise, you might jeopardize the entire deal and lose all the benefits that come with it. See, making it know that you’re taking part in a 1031 exchange make you vulnerable for exploitation by sellers.
Every realtor knows that such a transaction is a time sensitive affair and this make you vulnerable. Unscrupulous sellers might use this opportunity to frustrate your efforts. They might choose to hike the price to milk more out of you or to defeat the process.
Missing the deadline makes you ineligible for tax deferment which could deal your finances a terrible blow. If an exchange falls through, you still have to meet the professional fees that you’ve accumulated to that point.
3. Don’t take any boot
One of the core requirements of a 1031 property exchange is that you need to commit every last cent of the sale proceeds to buying the replacement property. Only then do you get to legally cheat the taxman without running into a boatload of trouble.
Ideally, you aren’t supposed to make any money during a property exchange, directly at least. If you have any money left over after the sale, otherwise known as a boot, you have a tax liability. Other than just paying tax, it would mean that you failed to take full advantage of the exchange process.
You should bear in mind that all monies from the sale should not come to you but should go to a qualified intermediary handling the process. Handling any of the funds nullifies the exchange, making you liable for tax gains.
Taking part in a section 1031 property exchange can help you grow your holdings on the commercial real estate sector. However, you need to meet all the laid down guidelines to harness all the advantages.
Contravening any other requirements nullifies your eligibility, making you liable for the capital gains taxes. Working with a qualified professional keeps you from making any mistakes that could cost you a great deal of money.