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Important 1031 Exchange Factors That Could Disrupt Your Transaction

Updated: Jul 9

After spending almost a year navigating the 1031 exchange process myself, I can confidently say that I am now well-versed in all aspects of 1031 exchanges, and you can rely on my expertise.

 

Many experienced investors are familiar with the fundamental requirements for a successful 1031 exchange, which, if executed properly, allow you to defer significant capital gains taxes. However, once you delve deeper into the process, you’ll discover there are many nuances that aren't immediately apparent. Here are some commonly overlooked details to consider.

 

What Most People Know About 1031 Exchanges

The new property must be of equal or greater value than the property being sold.

You have 45 days to identify a replacement property.

You have 180 days to complete the purchase of the new property.

Additional Important Details


Include Your Mortgage in the Sale Price:

This is a detail often overlooked. If you are selling a property for $500,000 but have a $200,000 mortgage on it, you need to exchange it for a property worth at least $500,000. This likely means you will need a mortgage of at least $200,000 on the new property as well.

 

Watch Out for the Boot:

If you sell your original property for $500,000 and purchase a new property for $400,000, the $100,000 difference, known as "the boot," will be subject to capital gains tax. Ensure that the new property is equal to or greater in value than the one you're selling.

 

The New Property Must Be in the U.S.:

You cannot use a 1031 exchange to purchase a property abroad, such as in the Côte d’Azur.

 

A Third Party Must Hold the Proceeds:

All proceeds from the sale must be held in escrow by a third party. If you touch the funds at any point, you will lose all tax benefits.

 

You Can Purchase Multiple Properties:

You are allowed to identify up to three replacement properties within 45 days after the sale of your original property. There are two exceptions:

 

You can identify more than three properties if their total value does not exceed 200% of the sales price of your original property.


You can identify an unlimited number of properties as long as you eventually acquire at least 95% of their total value. Your intermediary will help you legally document your target properties.


Deferred Capital Gains Disappear Upon Death:

Although tax gains are deferred, they are eliminated upon your death. Your heirs inherit the property without the deferred capital gains tax obligations.

 

Final Thoughts

Ultimately, the 1031 exchange remains an excellent strategy for preserving your equity and deferring taxes. However, it’s crucial to thoroughly understand all the rules and nuances. A single mistake can nullify your tax benefits and cost you your gains.


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