Owning real estate can be a great way to diversify your investment portfolio. Those who choose to own real estate often rely on a 1031, or like-kind exchange, to help provide the ability to defer capital gains taxes on a property the owner chooses to sell as long as they acquire a new property of equal or greater value within a set time period. This can apply to a wide array of properties including commercial buildings, rental units, and other investment properties.
Although the minutia of this rule may have changed as the years go by, the foundational elements have remained the same for the last century.
What could go wrong?
One of the most common errors involving this type of transaction is a failure to follow the timeline. The government is meticulous in their expectation that property owners follow each step within the expected time period. Missing a deadline can mean you miss the opportunity to fulfill the requirements of the 1031. Miss the 1031 and the property owner can find themselves facing a very large capital tax bill.
What is the timeline?
In most cases, it begins with research. Once closing is complete on the original property, the property owner has 45 days to submit a list of three potential replacement properties. It is wise to have these prepared before finalizing the deal on the original property. The investor must generally close on one of these three properties within 180 days of the original property’s closing date.
How can I reduce the risk of an error?
By having an experienced team on your side. A set of professionals, likely including an attorney, real estate broker and tax accountant can help to make sure you meet all the required deadlines.