A 1031 Exchange is a strategy used by financially successful investors. According to 1031 Exchange Place, a real estate investor should never have to pay taxes on the gains from a sale when they intend to reinvest that income immediately in a similar type of property.
To put it simply, an owner can sell his or her property and do not have to pay capital gain taxes if he/she uses the profit from that sale to purchase a like-kind property.
However, this is easier said than done. Finding another owner with the property you want (and vice versa) can be difficult, especially given that 1031 exchanges are time-sensitive. This is why many property owners opt for a delayed exchange instead.
What Is Delayed Exchange?
In delayed 1031 exchanges, property owners seek the help of an independent third party called a qualified intermediary or exchange partner. After selling, property owners hand the money to his or her intermediary, who holds the money. The owner then has 45 days to identify a new property and 180 days to purchase it.
During this time, the property owner cannot touch the money. Once the owner finds a new property, the deed must mirror that of the old property for the IRS to accept the transaction as an exchange.
Advantages of a Delayed Exchange
During the time between selling the old property and buying a new one, some exchange partners offer to do more than merely hold money. These companies also include lawyers and accountants experienced in 1031 exchanges.
For a fee, they offer their assistance in pricing your property, holding your money, and helping their clients find the ideal property for exchange. Having this help available from intermediaries can give good advice and the best possible way to buy properties that can return bigger investments.
In one example, a woman was able to sell three old buildings worth $400,000 each. The net rent income from all three buildings was not enough to support her retirement since most of it went to repairs. After an intermediary assisted her, she had $1.2 million in net worth, which she exchanged for nine new properties in Texas. Her net income grew to $6,500 a month.
This is one example of how property owners can use the assistance exchange partner companies provide to find a more profitable property.
A 1031 exchange may benefit property owners, but having a delayed exchange including an exchange intermediate allows you to exchange in partnership with someone who is experienced and, for a fee, can help you find the property best suited for your money.