1031 Exchange Guidelines
Tonight we are going to look at tax deferred exchanges. A 1031 exchange is a tax move to avoid the capital gains from selling a property as long as you meet certain requirements by acquiring a property of like kind. The purpose of this blog is not to educate you on the entire 1031 exchange process, which I recommend that you hire a lawyer or a CPA for.
What I want to talk about is the mistake of identifying properties before you have found out that a lender is willing and most importantly in today’s economic environment able to fund the transaction. Today not all properties that have been identified are financeable. Even though a property may be at a high CAP Rates and cash flowing like a cash cow should doesn’t mean that lender today is going to finance that particular property for that particular borrower.
The problem is that once you “legally” identify a property it’s identified. AND you can only legally identify three properties. If you are not able to fund any of the three identified that client loses the ability to take advantage of the 1031 exchange, as its now closed to you.
So to avoid losing the 1031 exchange pre-qualify the properties ahead of time before they are legally identified.
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Excellant advise. It’s always been recommended that the exchangor begin the search for up to three replacement properties before closing on their relinquished property as that 45 Day Identification period literally “flys by”. You have added and aneven more compelling reason to start sooner, rather than later, in Identifying replacement property.
One other observation, a Section #103 exchange is a deferral, not an avoidance of taxable gain upon the sale of one’s property which qualifies for Section #1031.