Have you had a piece of property that is no longer serving you well? You might be no longer willing to sustain its upkeep because the profit is not enough, or you might have greener pastures you are eyeing. These days, getting a 1031 exchange of properties has gotten back to being a more viable option in the market. The question is, is it the right move for you? Here are some things to consider before taking it on.
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Is your property eligible for it?
The Internal Revenue Code states that any “property held for productive use in a trade or business or for investment” is eligible for an exchange. This means that you have a flexible option here, as you can choose from land or a structure that you have invested in, whether it’s an old building you no longer use or a boarding home you are leasing out.
Because this means that you need real property, real estate investment trusts cannot be used in this type of exchange. That is because you would mainly be trying to trade a share in exchange for a substantial piece of property, which would violate the terms of a 1031 exchange.
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Does it match the property you’re interested in?
The rules of a 1031 exchange call for a trade of “like-kind” properties. This means that you can exchange any property as long as they are the same type. Real estate is very diverse, and there are a ton of options that you can choose from, given that they are the same type of assets – meaning you can directly exchange the two properties without tax liabilities. That is what brings in the tax deferral.
Thankfully, this doesn’t mean you’re restricted to the exact form of structure you have in hand. For instance, you could be giving up a property that is acres of land, but you will be getting an active working clinic in return. Identifying what is available to you is important in determining what you will be getting in return for your property.
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What are your goals for the new property?
To get the best deal, you must identify what you’re looking to get from the exchange. Do you seek something that can provide you a stream of income passively or want to handle an entirely different operation than what you previously owned? Do you want a piece of land that you can develop?
All of these can determine your search on the market and whittles down what is best for you. This is where you would decide whether or not you are searching for triple-net (NNN) properties, Tenant-In-Common properties, or the recently popular Delaware Statutory Trust structure. Finding whichever suits your preferences and is eligible for your property exchange can make it all go smoother and end up a wiser investment.
If you have a keen interest in pushing through with a 1031 property exchange but you still need more information on the ins and outs of the process, get proper guidance from professionals so that you can get the best deal out of it.
