Grow Your Wealth with 1031 Property Swap

The 1031 property exchange process comes with a myriad of benefits that help real estate investors achieve their goals. However, you need to play by the rules to make the most of this lucrative opportunity.

The 1031 land exchange program was created with a specific goal in mind, one that makes it a hit with investors in the commercial real estate sector. It aims to help these investors avoid paying taxes without getting into trouble with the government.

The process, as detailed under section 1031 of the tax code, covers every aspect of commercial real estate, not just land. If you’re keen on joining the growing ranks of savvy real estate investors who are cashing on its benefits, bear a few crucial factors in mind.

Play it close to the chest

Unfortunately, you can’t tell a well-meaning human being from the one who means you harm. To this end, you need to maintain a veil of secrecy when going about the property swap process. A 1031 exchange is a time-sensitive project and this makes you vulnerable to exploitation.

You have 180 days to conclude the process; otherwise, you’re liable for any property gains from the sales proceed. Unscrupulous individuals aren’t above exploiting this bit of information for personal gains. A seller can decide to jack up the price of a possible replacement property because they are aware of your time constraints.

On the other hand, a malicious individual might choose to drag out the process out of spite. If you’re unable to seal the deal on all properties, you stand to lose a considerable sum of money. It’s better to emphasize that the transaction is time sensitive and avoid making yourself vulnerable to extortion.

Play by the rules

In addition to the time guidelines, you must adhere to the value guidelines when buying replacement property. Section 1031 of the tax code indicates that the value of the new property shouldn’t be lower than the value of the current holding, neither should it be worth more than twice the property.

As long the total value of the replacement property falls within the pricing guidelines, you have free reign on what to acquire. That means you can sell one property and replace it with a series of smaller properties. For instance, you can sell an apartment block and replace it with a series of duplexes, a small office block, a warehousing facility, and a ranch.

One of the tenets of the 1031 property swap is that the sales proceeds should be reinvested 100 percent into the new property. Any money that’s left over after the process is completed, known as taking boot, will be taxed for capital gains.

Choose your properties carefully

As long as you follow the replacement property value guidelines, you’re free to spread your properties across the country and the real estate sector. Such a move comes with many benefits that you can enjoy. It means you can move your real estate holding from one area to another.

From an investment perspective, it means you can escape the bad market and go after any promising real market or sector. Since you get to defer capital gains taxes on the sale, you will have deeper pockets going after your new property.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.