Understanding 1031 Exchange For Commercial Property
There are several tax advantages associated with the 1031 exchange. In fact, the 1031 exchange for commercial property has a window of 90 days in which you can replace a sold asset with a purchased one. This helps you avoid capital gains tax, along with related expenses.Â Your new acquisition must be a great fit for your managerial expertise, leverage your existing talent base, and complement the risk/return profiles of the other assets within your investment portfolio. If you are consider replacing one type of asset, say an apartment building, with a related asset like a boutique hotel, you’ll need to consider the greater challenges of managing a hospitality property against the relative ease and safety of managing long term rental property.
Market timing and current property trends also play into overall exchanges. Remember, the value of your new property may differ in value from your originally held asset. With this in mind, you have to be mindful of all possible scenarios. This includes gaining property value and collateral, while avoiding capital gains and other taxes.
Still, there are many advantages of the 1031 commercial property exchange. For one, you get significant tax benefits for owning new commercial properties and venues. Real estate investors can also relinquish qualified properties, while reinvesting their proceeds to buy new units. While certain time frames and regulations are in place, you are able to defer your taxes on these properties if purchased within the same business year.
Deferral of taxes can help you with low, adjusted costs. You can then use these funds towards your new investment or try to flip these purchases as well. By reinvesting in replacement properties, you are able to defer ordinary income and expenses. Similarly, you can avoid depreciation on your existing property and cross the tax bridge once your new property becomes actual collateral.
By deferring taxes, you are sure to have more money on hand for expenditures. In fact, your cash flow increases so you can effectively manage your new investment. This gives you increased leverage to purchase more properties if desired. Similarly, you are able to flip or sell newly acquired properties if the offers are right. This is far better than sitting on a property, paying all the taxes then selling it to a new owner.
One of the best advantages of 1031
One of the best advantages of 1031 is alleviating property maintenance costs. You also do not have to worry about association fees, as well as deed restrictions and other miscellaneous expenses. If you own a property or numerous properties, you can exchange and replace them for other units with fewer responsibilities. In fact, you can save time and money by simply hiring an onsite manager to take care of things for you across the board.
According to industry and financial experts, 1031 commercial property exchanges are a great way to accumulate cash flow and net worth increases. Even for a short period of time, owning a property still counts as security and collateral for loans and other investments. By utilizing these exchanges, investors can even pass their investments to children or other loved ones. This means the inheritors can continue eliminating the tax burden altogether, while stepping up the cost basis to meet current market value and share.
As with the advantages of 1031 for property owners, there are certain disadvantages as well. As an investor, you must stay abreast of all IRS rules and regulations pertaining to commercial property transfers. While you can defer taxes for investing back into the economy, you must make sure to comply fully so no income is recognized or assessed for taxation purposes. Failure to follow all guidelines, however, can result in penalties being assessed and your tax status in jeopardy.
Several obstacles and hurdles for anyone
There are several obstacles and hurdles for anyone trying to comply with the 1031 Exchange policy. For one, you must find a replacement property within the first 45 days of the three month time frame. There are no extensions allowed once the 90 days are up but you can speak to the IRS if that happens. To avoid the pitfalls, it is best to consult with a real estate adviser. With years of extensive industry experience, he or she can help you successfully with you 1031 commercial property exchanges.
As part of any exchange your replacement property’s tax basis will be reduced. This means the tax basis of the replacement unit is basically the purchase price minus the gain deferred on the sale of the old property. While this may seem confusing, it is only if you plan to sell your newly acquired commercial property in the near or far future. In this case, the deferred gain will have to be taxed by the IRS to fill the previous void.
Losses on these commercial property exchanges are also deferred
Losses on these commercial property exchanges are also deferred. This goes the same for applicable taxes but its important to understand your options. You also need to understand that future taxes may be higher than your original taxes. No truer is this than if you plan on holding on to these properties, which will still assess capital gains taxes. Remember the 1031 commercial property exchange is tax deferred not tax free.
Again, your 1031 Exchange should be completed under the tutelage of a professional. This includes a seasoned and reputable commercial real estate investment firm. They can help you navigate the murky waters of this policy, while ensuring you comply with all the rules, guidelines and regulations. Most of all, they will ensure you meet all IRS criteria, especially when it comes to tax deferments that you MUST pay later on.
As always, your advisor will explain the benefits of property exchanges versus sales. He or she will fully analyze and assess your goals so that everyone is on the same page. From finding suitable replacement properties to meeting all your financial and investment goals, you can truly count on advisors to put your 1031 exchanges into fruition.
For more information on this commercial property exchange plan, simply check the Web. Google has some helpful resources on finding new properties within your 90 day time frame. You should also speak to a property investment firm as they too can help you ensure optimal results within time and budget. Another option is to contact your financial specialist who can also map out a strategic way to save money on new property purchases.