Things you should know about real estate exchange

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If you ever have thought about contacting a real estate agent in order to exchange your property and you were curious about the benefits you might have by doing so, we have some answers for you. You know the “1031 Section” in the Tax Code? Everybody does. From your child’s teacher at school, to investors, they all are interested in it. Moreover, this is because it makes real estate exchange very easy. However, you should know about exchanges made under that section a few aspects.

What is 1031 exchange?

It is also named “like-kind exchange” and under that section, you are able to exchange any type of property you might have to a similar one in price. Yes, you can exchange whatever building you want for another that has the same value. If you want to exchange a farm for a motel, you can. The best part about this type of real estate exchange is that you will not pay any tax like the one you would if you would have sold it. Because the properties are simply swapped, you are not generating any income.

It is liable only for commercial use

If you are new with the term, thought you maybe can make a good exchange for yourself, and get a bigger house for your family, there is bad news. You cannot make exchanges under this Section for personal use properties. It is liable only for commercial properties. There are a few exceptions. You can exchange valuable art objects under the 1031 Section and it is applicable in interests as tenant in common.

You cannot do the exchange directly and you must close in 6 months

Because it is an exchange, none of the parts directly implied can manage it. The solution is a third party like a commercial real estate agent or broker. You are practically designating them to manage your money in order none of the parts would pay taxes after the transaction ends. On the way, you can designate three properties, tops. However, in the end you must choose one as a final replacement property. You should be aware about the fact that this is a delayed transaction. This is because the chances to find a similar property are quite small. You can decide over a property within 45 days and after another 135, you must close the transaction.

Take into account mortgages for your safety

Before deciding over that hotel, think about mortgages the replacement property might be the object of. Think wisely before and decide if your bank account can handle the amount. The fact that real estate exchanges are probably not your main source of income is a plus. Think about getting a replacement property with smaller mortgage loans and this will be another source of income.

Be wise in exchanges made under the 1031 Section and hire a professional when it comes to the real estate agent. They can provide useful pieces of advice on the way and offer step-to-step guidance.

June 2022