As an investor, you must always ensure that your investments align with your financial objectives. If they can’t, you might consider moving on to another to ensure you meet your goals. One of the most common resolutions investors make is considering a 1031 exchange.
You’ll exchange one property or ‘like-kind’ with another in this exchange. But the question most people ask is, “How do you ensure that you make a good investment with a 1031 exchange?”
Well, we have a few tips you could use. Here are some of the things you could do.
1. Consider how marketable your replacement property is
Wise investors don’t think about the solution they are bringing now. They think ahead. In this case, you could make a mistake if you do a 1031 exchange to avoid taxes.
Instead, consider the future marketability of the replacement property. Although you might be running away from paying taxes, you might be buying an investment property that won’t bring in any future income.
2. Work with experts
The 1031 exchange is a long one and can be complex at times. It also involves many professionals, including real estate brokers, qualified intermediaries, and attorneys, among other experts. So, as a wise investor, the best thing is to work with experts, especially if you don’t know the 1031 exchange basics quite well.
So, what other benefits do you get when you work with experts? These people will guide you throughout the journey. You’ll have guidance every step until the process is over.
3. Update yourself on the rules of a 1031 exchange
Any experienced expert will tell you this: The 1031 exchange occurs quickly. For instance, once you sell your property, you have up to 45 days to identify the replacement property. After this, you have up to 180 days to close the deal on that property.
You don’t qualify for a capital gains tax deferment if you miss the deadlines. So, here’s the thing. Ensure that you know the rules, especially the tax codes. These rules can change by the day, so you must update yourself daily.
4. Sign exchange documents before closing the deal
For a successful exchange, investors need to sign exchange documents. These documents include agreements between the investor and the intermediary and the assignment of your rights.
A good investor will ensure that they sign these documents before you close the purchase of the replacement property. You can also do it on the date of the purchase to ensure that you meet deadlines and avoid unnecessary delays.
5. Have a backup plan
Sometimes, deals can go south. And if they do, you’ll need to look for an alternative. When this happens during a 1031 exchange, it can disqualify you from getting the benefits of the exchange.
The best thing – therefore, is to have a backup plan. You can run to it if the first deal crumbles within the dying minutes of the agreement. It will ensure that you are safe.