Most people know that when you sell a long-term investment, such as real estate, you’ll have to pay taxes. Unfortunately, these taxes can be significant. However, many savvy investors use a strategy called the 1031 Deferred Tax Exchange, or simply the 1031 Exchange, to defer these taxes.
While we’ve previously discussed the basics of the 1031 Exchange, today we’ll dive deeper into Advanced 1031 Exchange Strategies and what you need to know to maximize its benefits.
Below are four advanced strategies that investors frequently use:
1. Delayed Exchange
The Delayed Exchange is the most commonly used 1031 strategy. In this approach, the investor sells their current property (the relinquished property) first. Then, they purchase a new property (the replacement property) using the proceeds from the sale.
To facilitate the process, investors hire a Qualified Intermediary (QI). After selling the relinquished property, the QI holds the proceeds in escrow. According to the 1031 Exchange rules, investors must identify a replacement property within 45 days. Additionally, they must complete the purchase within 180 days.
2. Reverse Exchange
Although most investors prefer the Delayed Exchange, some situations make it difficult to find a suitable replacement property after selling the relinquished one. In such cases, investors can opt for the Reverse Exchange.
In this strategy, the investor purchases the replacement property before selling the relinquished property. Once the new property is acquired, the investor has 45 days to identify which property to sell. After that, they have 180 days to complete the entire transaction.
3. Improvement or Construction Exchange
Sometimes, investors may want to modify the replacement property to better suit their needs. The Improvement or Construction Exchange is perfect for those who wish to build or renovate a property.
After selling the relinquished property, the investor identifies the replacement property and begins construction or renovation. They are given 180 days to complete the project and finalize the exchange.
4. Simultaneous Exchange
In a Simultaneous Exchange, the sale of the relinquished property and the purchase of the replacement property occur on the same day. This process can take place in one of three ways:
- Two-party exchange: The owners of the two properties directly swap deeds.
- Three-party exchange: An accommodating party helps facilitate the exchange.
- Qualified Intermediary: A professional intermediary manages the entire process and ensures the transaction complies with IRS guidelines.
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Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
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