In the real estate market, business owners, real estate agents, and property investors can take advantage of what is called the 1031 exchange. For the uninitiated, the Internal Revenue Code Section 1031 states that investors can defer all taxable liabilities involved in the sale of an estate, provided they purchase another investment property.
The property investors also have to comply with the federally regulated guidelines and work within a specified period. For one, they need to identify the replacement estate within 45 days from the time the relinquished lot is sold. Two, the replacement property must be similar to the relinquished lot, which means it is in the US, has the same features, and has equal or greater value with the sold property.
As there are investment property guidelines to meet and specific timeframes to follow, here’s our guide on finding the right replacement estate as soon as possible:
- Prepare ahead of time
Remember that the time starts clicking as soon as your property is sold. One month and a half may not be enough to find a suitable replacement estate, which is why you need to prepare ahead of time. Start to look for a place even before the sale of your old property. In doing so, you guarantee yourself that you will have ample time to find the right one.
- Get a highly reputable advisor
As the real estate investment process may be a complex one, it’s best to work with a highly reputable advisor who has a robust knowledge of the 1031 process and DSTs, excellent skills, and expertise in the field. With their industry experience, you should expect an advisor to have connections and relationships with various sponsors of DST’s.
- Search beyond the locality
As mentioned above, the replacement property must be in the United States. The good thing is that the guideline doesn’t have any restrictions on its location as long as it’s in the country. If finding a property in your locality proves to be rather scarce, you can broaden your search and have your realtor look for a prospective land in other states.
- Look for alternatives
When it comes to the 1031 Exchange, there’s another alternative option for buying a property. Known as the Delaware Statutory Trust (DST), this tax-advantaged entity is considered by the IRS as a “like-kind” investment. It offers the following benefits:
- Access to the institutional quality replacement asset
- Professional management for passive investment
- Availability in all commercial asset classes
- Low minimum for a diversified investment
- Solid estate planning tool
With all the advantages mentioned above, you may want to consider taking the DST route. Yet, as with any type of investment, it’s crucial to understand the terms and conditions and be wary of potential risks before choosing an option.
Conclusion
Overall, finding a suitable replacement property can be straightforward and relatively easy. All it takes is to prepare ahead of time, work with a reputable broker, search beyond the locality, and look for alternatives. Be sure to follow the valuable tips mentioned above and see how finding a replacement estate quicker can help you take advantage of the 1031 exchange for your deferred tax liabilities.
At PJL Investments, we bridge the gap between private markets and public investors. We offer investment property management and financial planning to high net-worth individuals and family estates. If you’re looking for a suitable1031 exchange advisor in San Antonio, TX, get in touch with us today to see how we can help!