As a commercial property investor, there are many reasons to consider utilizing a 1031 exchange. With the ability to swap properties without taking a financial hit from capital gains tax, a 1031 exchange is an excellent resource in commercial real estate investment. However, before you begin the process of a 1031 exchange, you’ll need to consider these three important components to make your exchange a success.
Understand the Timeframes
In completing a 1031 exchange, there are two critical dates to remember. First, you’ll need to understand the 45-day identification period. From the date that the relinquished property closes, you, the taxpayer, will have 45 days to identify a replacement property that you intend to acquire in the exchange. In addition to the 45-day identification window, you’ll need to consider the 180-day exchange period. The replacement property or properties must be received by the taxpayer and the exchange must be completed within 180 days of the exchange property’s sale, or by the due date of the tax return for the year in which the relinquished property was sold (whichever comes first).
Both rules are strictly held and cannot be extended even if the 45th or 180th days fall on a Saturday, Sunday, or federal holiday. If you make these timelines an afterthought, your attempt at a 1031 exchange may be unsuccessful. So, plan ahead and keep these key deadlines in mind.
When it comes to property identification, rules govern this as well. Generally, limits exist as to how many properties can be identified. One rule of thumb is the three property rule, which allows the taxpayer to identify up to three properties. All three properties do not necessarily need to be acquired. To identify more than three properties, the 200% rule may be used. This allows for any number of properties may be identified, as long as the combined value does not exceed 200% of the fair market value of the relinquished property.
Any property that you identify must be considered like-kind, meaning that they are the same type of property (i.e. any property used for trade of business). Though the property must be like-kind, you will also need to consider whether you are planning to invest in a different asset class. Perhaps you would like to make the move from a multi-family property investment to a retail investment. This is something that needs to be considered well before you begin the process. With the help of an experienced commercial real estate broker, you can properly appraise the value of potential properties and identify the best property for your 1031 exchange.
Know the Key Players
Finally, you need to know who is involved in a successful 1031 exchange. There are many players contributing to the process, not just the seller and the buyer. Other key players include qualified intermediaries, attorneys, and commercial brokers, to name a few.
These professionals have vital roles to play in the exchange process as well. Attorneys are a valuable resource during a 1031 exchange, helping you make sure that you are compliant with the associated regulations. You may even choose to consult with a tax lawyer before beginning the process to educate yourself on the current regulations in place. Commercial real estate brokers can help you understand the current and future market conditions, enabling you to maximize your financial position. In addition, brokers are invaluable for disposing of your current property, identifying new properties for the exchange, and evaluating possible replacement properties.
Get Started on Your 1031 Exchange
Are you considering a1031 exchange? If so, you’ll need the right people in your corner. At Caton Commercial Real Estate Group, we offer a variety of commercial property services, including commercial property valuation, as well as brokerage and investment expertise that is invaluable during a 1031 exchange. Get in touch with us today to learn more about how Caton Commercial can partner with you!