Most people acquire replacement properties in a bid to increase their cash flows by deferring their taxes. The 1031 exchange is a great tool that has been used by real estate investors from all over for a very long time. Through the acquisition of replacement property, you can delay paying your taxes on the sale of property. The law dictates that you have to pay tax on gains from the disposal of business or investment property but real estate investors can go around this by acquiring replacement property.
The law sees this as exchanging property rather than selling. The idea behind the acquisition of replacement property and deferring of taxes stems from the fact that the law assumes that there is no money left for one to pay taxes with. Though a lot of things can be classified under replacement property there are certain things such as inventory in trade, stocks, partnership interests and certificates of trust that are not recognized as replacement property.
It is important to note that you only stand to enjoy a tax deferment benefit if the property you acquire in replacement of the one you sell is similar either in class, character or nature to your original property. Replacement property needs to be either greater in value or equal in value to the property you are disposing. This article will be looking at how you can find the perfect replacement property.
Do not narrow down your options when it comes to choosing replacement property. Do not focus on a single property because it could be bought by somebody else before you get the money to buy it yourself.
Have a long list of options with you as long as they are like in kind to the property you are looking to sell.
It is important that you give yourself enough time to acquire replacement property. Finding the right replacement property is not as easy as many people think. You should start looking for replacement property even before you sell your current property because there are strict timelines in the 1031 exchange that have to be adhered to.
Finally, you need to find yourself a number of trusted advisors. Getting replacement property on your own can be difficult, which is why you need to hire a team of experienced advisors to help you. Your team should always have a financial planner. Always choose a financial planner who is experienced in 1031 exchanges for faster results. Your team should also have a commercial real estate broker in its midst for a wider window for replacement property acquisition. Take as much time as needed to look for advisors and good replacement properties before you relinquish your current property.