Experts’ opinions on 1031 property exchange – advantages and disadvantages
Nowadays, there are several ways in which people can sell their properties and move to larger premises. One of them is to sell the one they own first and then buy a new property with the money they got on the sale. However, a more convenient method seems to be the one implemented by the government several years ago, called the 1031 property exchange. This one allows the owner to exchange a property for another like-kind one. As great as it may sound, there are both advantages and disadvantages that come with this type of exchange. Here’s what experts have to say about it.
Advantage – it allows people to defer some taxes
One of the greatest advantages that the 1031 exchange strategy comes with is that it gives people the possibility to defer some taxes. Many people who do not know much about this strategy are of the opinion that the DST 1031 eliminates all taxes, when in fact this is not entirely true, not to mention that there are certain criteria that need to be met in order to benefit from tax deferral. It is essential that the property you own has equal value to the one you want to exchange it for. Thus, taxes that result from making the exchange are significantly lower (or sometimes there are no taxes at all!) compared to the situation when you would have sold the property “the old way”.
Disadvantage – difficulty in meeting the criteria
According to experts, there are various roadblocks frequently hidden in the exchange process and investors who hit them, usually do not succeed in making the exchange. The most common problem is related to finding a replacement property within the pre-established period of 45 days from the day you sold your relinquished property. In most cases, this period is extremely short and makes investors feel frustrated and anxious that they cannot meet the rules and regulations the IRS has. This is why it is best to work with a professional that has vast knowledge in the 1031 exchange domain to help you throughout the entire process.
Advantage – no taxes, more money to invest in other things
Deferred taxes – this is music to investors’ ears. Knowing that they have certain taxes significantly reduced or completely eliminated is probably the best news they can get. The money they would have spent on taxes can now, due to the 1031 exchange strategy, be invested in other things.
Disadvantage – losses will not be recognized
When it comes to 1031 exchange, losses behave the same as applicable taxes, in the sense that both of them are deferred. This means that your finances may suffer a lot if it happens for you to defer losses that promised to provide offset large profits, especially if this happens in a windfall profit year.
Investors interested in exchanging properties with the 1031 strategy should think about it very carefully and should weigh both the advantages and disadvantages that come with this if they want to ensure they are making the best investment decisions.