5 Steps To A 1031 Exchange
We all want our money to keep working for us. 1031 exchanges help commercial real estate investors swap capital earnings made from one sold asset to another “like-kind” asset. But 1031s can get really hairy really fast.
Wellington Realty managing partner David Shaffer has assisted in dozens of 1031 exchanges, including the recent sale of the 164-unit Primavera Apartments in Fort Worth by an international investor. David shared some invaluable tips about 1031s.
1. Don’t think in terms of tax law.
Think in terms of investment value. If you’re in a 1031 exchange for the capital gains deferral only, you’ll likely end up with a lemon of an investment property.
2. Don’t touch the money.
Generally speaking, if you touch your capital gains, you’ll pay taxes on it. Keep your money tied up in investments and you’ll be golden.
3. Watch the calendar.
1031s come with all kinds of time restrictions. After you sell a property, you’ll have 45 days to identify like-kind properties and 180 days to close on a property. If you go over your time limits, you’ll pay taxes or have to start back at square one with your investment.
4. Vet your accommodator like your money depends on it (because it does).
Pick someone who is stable and reliable, like a bank, as an accommodator because this person will be handling all your money.
5. Interpret “like-kind” as “for investment purposes.”
There’s a lot of room for interpretation in “like-kind” exchanges, but generally speaking, count your investments only. If you own livestock, equipment or properties with two different purposes, they’ll usually qualify if you're selling, for example, equipment for equipment and both count as investments for you.