Finding The Right Replacement Property
Acquiring replacement property is a great way to increase your cash flow by deferring taxes. Real estate investors have used the 1031 exchange for very many years. Through the 1031 exchange, real estate investors can legally delay payment of their taxes after the sale of property. Though the law dictates that you have to pay property sale taxes immediately you sell investment or business property, you can go around this by getting replacement property.
You defer taxes because the law views this as more of an exchange rather than a sale. You benefit from tax deferring because the law assumes that you have nothing left to buy new property with after acquisition of replacement property. There are a number of things that do not qualify to be replacement properties such as stocks, certificates of trust, partnership interests and inventory property.
It is important to note that you only stand to enjoy a tax deferment benefit if the property you acquire in replacement of the one you sell is similar either in class, character or nature to your original property. Replacement property needs to be either greater in value or equal in value to the property you are disposing. In this article, we will be looking at how you can find the perfect replacement property.
Do not narrow down your options when it comes to choosing replacement property. This is important because the real estate market is very competitive and somebody could buy the property you have your eyes on before you.
Have a long list of options with you as long as they are like in kind to the property you are looking to sell.
Secondly, you have to ensure that you give yourself enough time. You may find choosing the right replacement property a daunting task, which is why you have to ensure that you have enough time. It is important to note that there are strict timelines that one has to adhere to so as to qualify for the 1031 exchange, which is why you need to begin your search for replacement property even before you sell your current property.
To find the perfect replacement property, you have to ensure that you hire a number of trusted advisors. A team of trusted advisors will widen your window of getting potential replacement property. One such advisor is a financial planner. You should however ensure that you hire a financial planner who deals with products that qualify for the 1031 exchange. You can also hire a commercial real estate broker to help you acquire replacement properties since they have more connections in the world of commercial real estate. Take as much time as needed to look for advisors and good replacement properties before you relinquish your current property.