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1031 Exchange: What Real Estate Investors Need To Know

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“The way to win Monopoly is to buy four green houses and then trade up for a large red hotel. The same rule worked in my life.” -Robert Kiyosaki

As a real estate investor, you may be familiar with the concept of 1031 exchanges. A 1031 exchange is a tax-deferred transaction that allows you to sell one property and buy another of equal or greater value without paying capital gains taxes on the sale. This way, you can reinvest your profits and grow your portfolio with out losing money to taxes.

However, 1031 exchanges are not as simple as they sound. There are strict rules and deadlines that you must follow to qualify for this tax benefit. Here are some of the key steps and requirements that you need to know before you start a 1031 exchange: 

– Identify a qualified intermediary. A qualified intermediary is a third-party entity that facilitates the exchange and holds the funds from the sale of your property until you buy the replacement property.  

– Sell your property and transfer the proceeds to the qualified intermediary. You cannot take possession of the sales proceeds, this could disqualify the entire transaction and you’ll owe taxes on all of your capital gains. 

– Identify potential replacement properties. Within 45 days of selling your property, you must identify the potential replacement properties in writing and send the list to the qualified intermediary. In order to get the full tax deferral, the properties must be of equal or greater value than the property you sold and must be used for investment or business purposes. 

– Buy there placement property and complete the exchange. Within 180 days of selling your property you must close on one or more of the replacement properties that you identified. The qualified intermediary will transfer the funds from the sale of your property to the seller of the replacement property and complete the exchange. 

By following these steps, you can successfully defer taxes on your real estate transactions and leverage the power of 1031 exchanges. However, keep in mind that 1031 exchanges are complex and involve many risks and challenges. You should always consult with a professional tax advisor and a qualified intermediary before starting an exchange. They can help you navigate the rules and regulations and avoid any pitfalls that could jeopardize your tax benefits.

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