If you’ve invested in a commercial real estate, it’s not easy to ignore the advantage of a 1031 tax-deferred exchange. Not when it means that you get to lower your tax bill by about 40 percent.
Taking part in a property exchange as dictated by Section 1031 of the Tax Code lets you hang on to all your tax gains. However, since every rose comes with thorns, there are a few things that you need to avoid:
Don’t Be Impulsive
To take full advantage of the tax delay, you should commit your proceeds to buying replacement property. The whole point of the exchange is not to make you profit from the sale, at least not directly. This does not mean that you will walk away empty-handed. With proper research, you can earn a significant monthly income.
For instance, you can sell off low-performing properties and replace them with better ones. By taking part in a 1031 property exchange, you’re playing the long game. Hence, the fact that you won’t get any money directly from the sale should not be a deterrent.
Don’t Miss the Deadlines
The Internal Revenue Service doesn’t make the exchange process a piece of cake. They have you on a short leash. You have exactly six months to seal the deal on both properties. Therefore, time is of the essence when taking part in a property exchange.
Missing the deadlines triggers the capital gains tax and negatively affects your investment plans. It helps to procure the services of a seasoned veteran when considering such a deal.
A 1031 property exchange comes with a few requirements as stipulated in the Tax Code. You must comply with all of them to enjoy the benefits of taking part in a 1031 exchange.