1031 Exchanges have been around for quite a long time. The IRS has clear guidelines on what qualifies and the rules for doing one. If you qualify, doing one correctly allows you to defer all taxes until you eventually sell your property outright. This article isn’t to go over the details. it’s to point out some of the considerations when doing an exchange.
You are exchanging for another piece of real estate. Whether it is one you will own and manage alone or if you will be a tenant in common, you need to be aware of the costs and risks of the exchanged property.
What will be the costs of ownership of the new property? Will insurance costs increase, property taxes go up? Are there association fees? Management fees, deferred maintenance to handle? Are there vacancy issues, long term leases, rent control issues, etc?
Will the time constraints of the 1031 allow the exchange plenty of time to complete? What if a last minute disclosure is uncovered that makes the purchase unsatisfactory?
What are the demographics of the new area? Property values increasing? Employment rate at a solid level? What is the risk of hurricane, earthquake, floods, etc.?
If you own with others, does majority vote carry a decision or must it be unanimous?
If it’s an income property, what is going to be your cash on cash return? Will it be variable or contractual? Beware of high projections that may be significantly reduced after fees and costs of maintenance, improvements, operations, etc.
Consider how long you intend to own the new property.
Know if the area is in an emerging market or a built out section. Are any major developments scheduled nearby that may affect future values?
If this property is to pass to heirs in the event of your death, are they capable of managing it or knowing how to liquidate it in a cost effective manner?
The list above is not comprehensive, but should plant some seeds regarding aspects to ponder before entering into an exchange.
Exchanges are great when all goes according to plan, but can also be a nightmare when unexpected situations present themselves.
Paula Straub
http://www.savegainstax.com/
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html
Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php
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