Like-kind property exchange has become lately a fairly popular investment idea, especially for those who want an extra income monthly. And although at the beginning the term of “like-kind” was taken quite literally and made the entire process complicated, the nowadays legislation offers more flexibility to investors. This kind of investment exchange is a tax-deferred one, bringing plenty of benefits to those practicing it. The only rule for your investments to remain like this is to strictly follow the IRS legislation in force. However, below are a couple of tips in order to make your investments a lot easier.
1. Only for business purposes
In order for a building to qualify for this type of exchange, it is necessary that its status specify that it is for commercial purposes only. This means no personal residence for inhabiting purposes could qualify. However, if one desires to buy a vacation home and keep it as a rental, this qualifies for 1031 exchange. Also, the transaction must be performed as an exchange and not as a sell and buy process. This means a bit of a complicated process, in which is necessary the involvement of a third party.
2. “Like-kind” does not mean what you think it does
We mentioned in the beginning that in past times, the legislation was quite rigid, and it only allowed investors to exchange two exact similar properties. However, as the time passed, a more flexible regulation was adopted, now “like-kind” referring mainly at the property’s market value. In order for an exchange of this kind to remain tax-deferred, two similar properties in price must be exchanged. It does not matter the purpose those satisfy, one being able to exchange a commercial building for a farm, raw land, a shopping center, if their prices are similar.
3. You will need intermediaries
Therefore, those DIY investors should pay attention to this. The tax-deferred rule applies only if the investors does not enter in the possession of the money resulted from these transactions at any time. As a result, they will need a third party to manage them, help them find a buyer for their property, as well as an exchange property with which to de the swap. Also, their legal opinions and advice are highly valuable, especially for those unfamiliar with this type of investments. Also, certain agencies specialized in helping 1031 investors have the ability of providing all the necessary paperwork, in an efficient manner. This will help them follow the strict timeframes in which these swaps can be made.
4. Follow the timeframe
We previously mentioned that all these exchanges must follow strict timeframes. These timeframes include weekends and holidays; therefore make sure you strictly follow your specialists pieces of advice. This will make the difference between a successful investment and failure.
Make sure you search your collaborators well, because not all agencies have the same experience in the matter. Don’t rush and maybe ask for other investor’s opinions.