Want To Use A 1031 Exchange? 3 Things You Need To Know

If you've decided to use a 1031 exchange for your investment property, now's the time to do your homework. 1031 exchanges are complex and can lead to serious mistakes. Unfortunately, mistakes with a 1031 exchange can get you in trouble with the IRS. That's why you need to understand the rules and requirements involved in a 1031 exchange. Before you start the exchange process, read the list below. This information will help you avoid mistakes when using a 1031 exchange. 

Understand the Five Exchange Types

If you're going to use a 1031 exchange, make sure you understand the different options. There are five types.

Delayed 

With a delayed exchange, you'll have a grace period when you can acquire your new property. This exchange gives you time to find your next property. 

Simultaneous

When you use a delayed exchange, you'll buy your replacement property as soon as you sell your current property. There is no waiting period for the transaction. 

Delayed Reverse

If you've already found your replacement property, you'll want to use a delayed reverse exchange. This type of exchange lets you secure the replacement property before you sell your current property. 

Delayed Built-to-Suit

If you want to build a property that suits your needs, a delayed build-to-suit exchange is your best option. This option lets you buy new construction after the sale of your existing property. 

Simultaneous Build-to-Suit

If you've already started construction on a new property, simultaneous build-to-suit will work for you. This type of exchange allows you to start construction on a new property before you sell your existing property. 

Know the Property Requirements

When it comes to using a 1031 exchange, you need to know the property requirements. Two types of property are covered by a 1031 exchange. Those are like-kind and real property. 

Like-Kind Property

Exchange rules require that only like-kind properties can get exchanged. That means the properties must be similar to each other. 

Real Property

1031 exchange rules require that only real property can get exchanged. That includes business and investment real property. 

Follow the 1031 Exchange Rules

If you're going to transfer property using a 1031 exchange, you need to follow the rules. First, you must exchange for a property that's of equal or greater value than your current property. Second, you must find your replacement property within the timeline. Third, you must buy the property within the required timeline.  

For more info about 1031 exchange rules, contact a local company.