Tonight we are going to look at 1031 exchanges. A 1031 exchange is a tax move to avoid the capital gains from selling a property as long as you meet certain requirements by acquiring a property of like kind. The purpose of this blog is not to educate you on the entire 1031 exchange process, which I recommend that you hire a lawyer or a CPA for.
What I want to talk about is the mistake of identifying properties before you have found out that a lender is willing and most importantly in today's economic environment able to fund the transaction. Today not all properties that have been identified are financeable. Even though a property may be at a high CAP Rate and cash flowing like a cash cow should doesn't mean that lender today is going to finance that particular property for that particular borrower.
The problem is that once you "legally" identify a property its identified. AND you can only legally identify three properties. If you are not able to fund any of the three identified that client loses the ability to take advantage of the 1031 exchange, as its now closed to you.
So to avoid losing the 1031 exchange pre-qualify the properties ahead of time before they are legally identified.
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2 comments:
Just a question of semantics. A Section 1031 tax deferred exchange is just that, a deferral.It is most definitely NOT avoidance. All tax due upon sale is otherwise deferred by exchanging into qualified property and the basis on the old property is transferred into the newly acquired property.
Good point about the Identification Period.However, there is an antidote to the poison of a "failed exchange" which is an amendment to the Exchange Agreement providing for the exchange funds to be given to an Assignment Company and then paid to the taxpayer over time via an institutional funding agreement secured by an A+ rated life insurance company.
Thank you for the clarification, according to the Accomodator we talked to there was no other aternative so knowing that there is can be very helpful for all.
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