Cumming / Alpharetta News, Information & Resources

As a real estate investor, you understand that protecting the value of your investments is critical. Your solvency as a successful investor hinges upon your ability to turn low-value investments into high-value investments: success in the real estate industry means constantly running numbers and considering scenarios.

One tool that is incredibly important to real estate investors looking to grow the worth of their assets is the 1031 tax exchange. In short, 1031 tax exchangers are able to defer payment of capital gains taxes during the time that they are actively engaged in the investment real estate market. Deferment of taxes during this period allows investors to more rapidly grow the value of their holdings.

In order for the 1031 tax exchange process to work for you, however, it is important that you understand the rules and regulations that surround such exchanges. The 1031 exchange process has been set up by the IRS to allow investors a distinct advantage at a critical time in their investing careers – and successful 1031 exchanges are hardly handed over on a silver platter. One critical rule to which 1031 exchangers must adhere is in regards to the classification of property. Only property held for investment or business purposes, for example, qualifies for a 1031 exchanges. This means that a strip mall, warehouse, or plot of undeveloped land will qualify for an exchange – but your home will not.

Another important rule in the 1031 tax exchange process is the time limit. From the day that your exchange is set in motion (generally when the sale of your first property is completed), you have no more than 180 days to complete the purchase of your replacement property. The IRS is extremely strict about this rule: there are no accepted reasons for granting an extension. For some exchangers, the 180-day period will be cut short: this can happen if your tax bill for that year is due before the end of your allotted 180 days. Within this overall deadline, there is an important sub-deadline: the 45-day identification period. During this 45-day period, you are required to find and legally state your intent to purchase a suitable replacement property. Like the overarching deadline, the standards here are strict: there are no extensions granted, and you cannot change your mind once you have identified a replacement property.

Successfully completing a 1031 tax exchange, then, hinges on your ability and willingness to follow the rules set out by the IRS and the federal government to the absolute letter of the law. Remember that the 1031 exchange process was created by the IRS in order to provide investors with a much-needed tool – but it is not to be abused or misused in any way.