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1031 Exchange Real Estate: A Guide For Commercial Multifamily Properties

January 29, 2021 – Real Estate Investing

Commercial multifamily properties refer to induced residential assets done through the 1031 Exchange. Investing in properties using 1031 exchange real estate comes with key considerations to minimize the tax burden and other issues later on. It is a functional solution to reduce unexpected costs and to defer taxes.

The typical long-term capital gains rate can be magnified up to 20% or more if you know how to handle the strategy. Being fully investable in the next asset provides equity growth in the future and sets a more current income. Transform your investments into commercial multifamily properties and familiarize yourself with the ways to extract the golden benefits of the 1031 exchange.

What is 1031 exchange real estate meaning?

A 1031 exchange allows you to defer capital gains taxes whenever you sell an investment property and reinvest the sales into a property of a like-kind whose value is greater than or equal to the first property. The 1031 exchange is derived from section 1031 of the Internal Revenue Code.

Qualifications for 1031 Exchange Real Estate

To be eligible for the 1031 exchange real estate, the following conditions apply:

Unsold like-kind properties

One needs an income-producing property and ready to be sold to perform the exchange for commercial multifamily investments. This could be anything from the available choices, including small medical office buildings, strip retail centers, 1-4 unit rental property, and rental condos.

1031 real estate exchange

Is the capital gain you’re seeking to defer worth it?

Minimizing taxes can be a good hack, yet it is not always advisable for all cases. Take note that a capital gain of $50,000 below is just one small part to focus on. The 1031 investment often takes the value from downstream restrictions and sets up the exchange.

Did you set up a 1031 exchange, and are you still within your 45-day next investment identification window?

Evaluate the circumstances of setting up a 1031 exchange within 45 days of the next investment identification window. You must execute your strategy within this window.

Properties That Are Acceptable for a 1031 Exchange Real Estate

Qualified like-kind properties do not imply buying and selling the same types. The term ‘like-kind’ in the first place refers to the character or nature of the raw property and not solely its quality and grade.

Two specific property types are acceptable for IRC 1031 tax-deferral treatment:

  • Relinquished properties
  • Replacement properties.

Both are usually held for productive business and trade uses. To name a few properties under the categories, these types are suitable for 1031 exchange real estate.

  • Residential properties
  • Commercial properties
  • Rental properties
  • Raw land
  • Rental ski condo
  • Mitigation credits

1031 Real Estate Exchange Rules

Here are the top 1031 real estate exchange rules to keep in mind when exchanging multifamily property:

Facilitator

The property transactions’ facilitators must be present and involved as much as possible to verify that the prerequisites for the exchange are matching and all the documents submitted are valid.

Title

Ensure that the title of the replacement property and the first property’s name are parallel to what is originally written. It is best to double-check the property documents and amend the necessary actions before signing the deal’s last phase.

Timing requirements

After the first asset is sold, the 180-day and 45-day rules must be applied during the new property purchase. The requirements’ timing is imperative in proving that the transaction is legible and valid at all costs.

Similar exchange

The replacement property and original property must be similar in value as the life-kind exchange takes place. Transactions and deals will run smoothly if both types of properties have similar equity. Otherwise, the process may take a while and induce hassle as they review the requirements and other details.

1031 real estate exchange

Exchanging One Multifamily Property for Another

Are you planning to sell a multifamily property and invest in another? Here’s what you should do.

The Reverse Exchange

The reverse exchange is a dependable solution for investors if there are delayed payments for the relinquished properties. Through the Exchange Accommodation Titleholder or EAT, the exchange properties are titled in their distinctive names to avoid confusion and mismatch.

Identical Property Titles

Properties under identical property titles must have uniform names. The taxpayer listed on the purchase property should be identical to the taxpayer listed on the relinquished property.

Choosing Replacement Property

This exchange only applies to real estate properties. Unlike the standard life-kind exchanges, not all replacement properties cover evidence of indebtedness, bonds, notes, stocks, inventory, and other security details.

To favorably apply 1031 exchange into commercial multifamily properties, investors are advised to know the types of the properties skin-deep and acquaint themselves with the different setups of the said investment strategy.

It will be a lot easier for investors to plan for the next step if they are equipped with the standard knowledge on 1031 exchange real estate before confirming deals and agreements.

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