When doing a 1031 exchange, there are six rules you should follow: 

1. Know the deadlines. It’s 45 days to identify the property, and then 180 days to close on the property. The only reason we’re doing a 1031 exchange is to take our property and put it into another property so as to avoid the gain, which would otherwise be subject to capital gains taxes; don’t defeat the purpose by missing deadlines. 

2. Sign the exchange documents on or before the day of closing. This seems simple enough, but it’s critical; again, signing after the fact doesn’t serve our goal of avoiding the gain. 

3. Think about who will acquire the replacement property. Remember: When you sell a property in a 1031 exchange, the same entity needs to purchase the other property. Single-member LLCs are not identified, so as long as you’re a single-member LLC, that can adjust. Just make sure you have everything lined up prior to closing so that the same entity is prepared to purchase the other property. 

“Don’t defeat the purpose by missing deadlines.”

4. Buy enough replacement property for the gain. I had a personal property that I sold for $450,000. With that money, I then had to go buy another property that was a minimum of $450,000 or more. In this example, I sold a duplex and then purchased an eight-plex. Since the eight-plex was naturally way more expensive than the duplex, it afforded me the ability to exchange into it. Had I taken my $450,000 and put it into a property worth only $425,000, I simply wouldn’t have met the requirements of the exchange.

5. Be aware of the expenses. When you give a credit to that buyer, whether for rent or other things, that may affect the amount of gain that you’re paying. Just know that if you end up giving something like that to avoid the gains, then you may want to come in with cash at closing. 

6. Think about experience. Make sure you’re choosing an intermediary who knows what they’re doing with 1031 exchanges. If their paperwork is wrong or they’re not giving you all the information you need, it can muddy the waters. Without access to the clear and properly organized information needed for you to actually execute the 1031, you could end up losing the replacement property, paying more money than necessary, or dealing with loads of stress and confusion.  

I hope these items regarding your approach to a 1031 exchange were helpful. If you have further questions on this or any other real estate topic, please feel free to reach out via phone or email. You’ll need to consult your CPA and attorney for a 1031 exchange, but we’re more than happy to refer you to trusted intermediaries if you need one.