1031 Properties: Understanding the Requirements

Written by admin on May 6th, 2011

Many people avoid the potential benefits of owning 1031 properties because they simply do not understand what does and does not qualify. There is some degree of ambiguity to the language that can be confusing. Let’s cut through some of the confusion to help you better understand.

1031 Exchanges and Like Properties

One thing that is important to remember is that there is more than real estate that qualifies for 1031 exchanges. The term “like properties” has caused no small degree of confusion over the years. It doesn’t mean that you can only do an exchange for a like business (hotel for hotel or office park for office park). What it does mean is that you can’t do an exchange from an SUV to a hotel and have that qualify as a 1031 property exchange as a vehicle and a hotel are not like properties. You can exchange a hotel for an office park because they are both commercial investment properties.

But, you also cannot exchange a primary residence for a vacation home either. While they are both real estate, one is residential and the other is recreational. You also could not exchange your family home for a hotel as that would be an exchange that went from residential to commercial. The difference may seem subtle but in the eyes of the IRS it is profound.

Advantages of Owning 1031 Properties

Owning 1031 properties offers a few distinct advantages. Few advantages go above and beyond the ability to defer tax payments until you reach the point of “cashing out” your investment portfolio. However, that’s really just the icing on the cake.

With an exchange, you can steadily increase the value of your real estate nest egg without being penalized and paying a penalty in taxes at every stage of growth. You can continuously increase the overall worth of your real estate empire. As long as all the proceeds from the sale of your existing property are invested into the new property, you’ll face no tax penalties as a result of the transaction.

1031 Property Exchanges Need a Qualified Intermediary

Almost everything in life will have some good to balance out the bad. There are few things in life that are perfect. The one thing that turns some people off from a transaction like this is the need for complete and total transparency in the exchange. This is achieved through a qualified intermediary (QI) who will have a great deal of control and importance in the entire exchange process. The biggest considering you need to keep in mind is to find a QI you can trust with an investment as important as this.

Find a trustworthy QI and a commercial real estate professional trained to deal with 1031 properties and you’ll be well on your way to an amazing future in real estate.

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