What Should and Shouldn’t be Done in Real Estate Exchanges

Disposal and acquisition of property under the 1031 Exchange section of the Internal Revenue code can be complicated, but it is more lucrative than other real estate investments. Under this section, a property can be swapped for another if they are like-kind or of the same types (i.e. business-for-business like an office for a shopping center). What makes this deal sweet is its virtual exemption from capital gains taxes. For prospective investors in this profitable business undertaking, the following dos and don’ts apply as in any other venture:

Do hire a certified public accountant, real estate agent, or any financial expert that has not seen your books in the last two years. The Internal Revenue Service publication 544 disqualifies monetary professionals who have worked on your behalf from handling property trades.

Do be mindful of the time element. A 1031 exchange has 180 days to be completed, with 45 days to spend in identifying a suitable property. Remember that there are no extensions for these transactions, and that holidays and weekends are included in the six-month period allotted to close the deal.

Do not trade in a property that has lesser value than the one you’re looking at. In such cases, capital gains taxes will kick in (any excess money from the exchange is taxable).