Bob Nelson, Eugene real estate investment broker with Pacwest Real Estate Investments, shares what he has learned over a 45-year career as a tax deferred exchange broker in an five part series. Bob specializes in tax deferred 1031 exchanges, particularly apartment complexes.
Anyone who has been involved with real estate for a period of time loves tax deferred exchange. Brokers, the more you know about 1031 exchanges, the more you can structure things to the advantage of your client.
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Bob Nelson’s Road Map for a Successful 1031 Exchange
There are five rules of the road to follow for successful qualification for a tax deferred exchange:
Rule One: The property owned, and the property being acquired through the exchange have to both qualify as like-kind property. Investment property or one held for business purposes qualifies as like-kind property.
Rule Two: The exchange must be even or up in value. The property acquired must be equal or greater value of that which was sold and all of the funds that came out of that sale must to go into the acquisition of the replacement property.
Rule Three: Use an exchange facilitator in order to complete the tax deferred exchange that leads to safe harbor.
Rule four: There is a time limit of 45 days from the sale of the relinquished property to identify a limited number of properties that would be potentially acceptable as replacement properties.
3 properties of any value can be identified. There is limitation on value but there’s a limitation on the number of properties that can be acquired.
Another option is to acquire a group of properties that the composite value doesn’t exceed 200% of the property sold.
Rule five: The last rule is keep track of time! There are only 180 days to complete a 1031 exchange: identify in the first 45, close in the remaining 135 days.
If you have moved your client through these rules, they should have qualified for a tax deferred exchange.
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
Your client should consult a CPA prior to entering into an exchange to make sure that they have their ducks in line. Once the transaction has closed, there’s no such thing as “un-closing” it and doing it properly.