Bob Nelson, Eugene real estate investment broker, Pacwest Real Estate Investments, and Marcia Edwards, Eugene residential broker, Windermere Real Estate, explain the important factors behind a successful 1031 exchange transaction.
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Investing using the 1031 exchange is key to growing your real estate investments without paying capital gains taxes. But how exactly do you use it successfully?
Timing in a 1031 Exchange
Timing is essential. There are two time periods in a 1031 exchange: the 45-day identification period and a 135-day transaction closure period.
If you’re planning for success, you’re going to be both identifying properties and closing the transaction within the initial 45-day period. That’s because once you’re past 45 days, you can’t re-identify or de-identify properties, even in the event that the property is sold to another buyer or the transaction for any other reason just doesn’t work out.
Closing the transaction within the 45-day identification period allows an investor to consider other options when the chosen property falls through. But to make your options even more flexible, you will need to know what can be identified.
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
The 1031 exchange gives you the opportunity to sell one property, acquire another property, and not be forced to pay the capital gains tax either at the federal or state level. Take full advantage of that opportunity by going in with a plan.
Identification in a 1031 Exchange
Right alongside proper timing, an important fact to keep in mind when identifying properties for a 1031 exchange is that you can identify more properties than just those you intend to purchase.
The first identification rule allows you to identify a property of any value, but limits you to identifying no more than three properties. If you’re looking to identify even more properties, the second identification rule, the 200% rule, lets you identify an unlimited number of properties- so long as the cumulative value of those properties does not exceed twice the sale price of the property you sold.
One rule will restrict the amount of properties that you can identify, and one rule will restrict the value of the properties that you can identify. Which rule is the right choice will depend on your situation.
When you’re considering a 1031 exchange, you won’t want to waste time. That time will cost you, and you’ll be caught with a capital gains tax. Going into the process with a solid plan is the first step to successful real estate investing.
Managing Your Real Estate Investments in a 1031 Exchange is from Bob Nelson and Marcia Edwards on the “Real Estate Today” Eugene, Oregon, radio show, which airs at 5:30pm daily on KPNW.