A 1031 Exchange can seem very complex, but if you have the right team of professionals in place, it can be a smooth and efficient process. Many 1031 buyers are confused on the specifics of like real estate swap and property exchange identification. They are uncertain about the rules of a like-minded exchange. What does this entail? Will I be able purchase a replacement property that suits my investment needs? Choosing the right 1031 Exchange Brokers and Firm is critical to the success of your outcome.
Like Real Estate Swap and Property Exchange Flexibility
1031 exchange buyers and sellers may be pleased to know that like real estate swap and property exchange identification is more liberal than it may seem. If you are selling a commercial building, you will be able to swap your previous real estate holding for a multi-family property. If you are selling a multi-family investment asset, a 1031 exchange can be structured to allow for the purchase of several single family Apartment units.
While like real estate swap and property exchange identification is flexible, there are some rules that do apply. A 1031 exchange buyer cannot purchase property outside of the United States as part of the transaction.
Additionally, a 1031 exchange client cannot swap Real Estate for Agricultural goods, such as livestock or some other form of product. The exchange must be for real estate. The purchaser will not be allowed to substitute real estate assets for personal property.
Since the rules for a 1031 exchange, specifically the types of properties that can be included in like real estate swap and property exchange identification are fairly broad, a Real Estate Broker can be flexible and creative when presenting a wide array of 1031 solutions for the client.
1031 Exchange Analytical Forecasting
As part of our in-depth process, we create a multitude of spreadsheets and analytical forecasting that illustrates different returns and upside for a wire range of properties. Since we are not limited by like real estate swap and property exchange identification, our firm is focused on not only providing on-market property solutions, but off-market availabilities as well. These are also known as pocket-listings, which an experienced Broker and his team will keep in his or her arsenal on a routine basis.
Off-market properties can be very attractive for investors, as they have not been widely shopped around by other Real Estate agents on the market. However, it is possible the seller will want a premium or more money in an off-market transaction because they are avoiding a bidding war that may otherwise take place. Keep in mind, each transaction varies greatly, as off-market sellers have different needs and potential reasons for unloading a property behind the scenes.
When it comes to like real estate swap and property exchange, there are many different types of properties investors can choose from.
Like Real Estate Swap and Property Exchange Identification Options
- Multi-family properties – These are typically 1-4 unit buildings and above. They are relatively stable purchases, but include property management and maintenance. Vacancies are typically limited. Depending on the City or State, some multi-family properties can house rent stabilized and rent controlled tenants. The paperwork, filings and annual rent escalations can be a challenge for these types of properties. Free market units are often the most desirable multi-family properties to purchase. In general, multi-family can be a stable investment.
- Triple Net Properties – The triple net criteria includes taxes, insurance and common area maintenance. In a triple net lease, the tenant pays for all of these expenses. There is little property management involved. The tenant can collect the rent each month without worrying about the property. An attractive triple net lease would be corporate backed national tenant. In the event of default or a lease0break, the Corporation guarantees the lease mitigating the risk for the owner.
- Absolute Net Properties – This is another form of a triple net lease. It includes the same items as a triple net lease, but also includes roof and building structure responsibilities from the tenant additional expenses paid for by the tenant. This is a very stress-free property for an owner to purchase.
- Land – The purchase of land can also be used for like real estate swap and property exchange. Some investors are looking to develop land, while others prefer to hold for appreciation. Speculative land purchases have created many millionaires throughout the course of real estate transactions. Possessing the vision and certainty for a neighborhood to rise in value is a trait that is hard to find.
- Single Family Investment Apartment or Home – A 1031 purchaser can buy an individual investment Apartment or Home as part of their 1031 exchange. In this scenario, there may occasionally be maintenance involved. With home ownership, its only fitting that roofs, windows, boilers, air conditioning systems and other vital hime components need repair every so often.
Like real estate swap and property exchange identification allows for broad flexibility when choosing the type of property to acquire as part of the 1031. However, there are strict rules that apply with regard to property identification and closing on your replacement property.
1031 Exchange Property Selection
After the sale of the original relinquished property, the buyer has 45 days to identify a replacement property. Luckily, the 1031 exchange buyer is able to specify several options for an investment. The like real estate swap and property exchange rules allow for the following:
- The Three-Property Rule – Up to three properties regardless of their market values. All
identified properties are not required to be purchased to satisfy the exchange; only the amount
needed to satisfy the value requirement.
- The 200% Rule – Any number of properties as long as the aggregate fair market value all od replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.
- The 95% Rule – Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified. In other words, 95% (or all) of the properties identified must be purchased or the entire exchange is invalid. An exception to the 95% rule is that if you close on a property within the 45 day period it still qualifies for the exchange.
Spend the 1031 Exchange Amount
When purchasing a 1031 exchange property, if you don’t spend the full amount of your 1031 and relinquished funds, you will have to pay tax on the boot or gain of your sale. A Broker or Attorney should help structure your transaction and make sure the replacement property is equal to or more than the funds from the sale of the relinquished property.
On many occasions, a buyer purchases a property that is more expensive than the relinquished property. In this case, a mortgage will be taken out for the transaction. An experienced commercial lender can assist with this transaction. Standard information for the lender will be required such as tax returns, bank statements, credit score and other criteria the bank requires.
While purchasing a property that meets the exact amount is a safe transaction for many buyers, some investors prefer a larger property with the help of a loan. There is no right or wrong, simply personal preference. As long as the criteria meets the like property swap and property exchange criteria, the 1031 purchaser can expand his or her horizons.
Keep in mind, additional expenses such as attorney fees, transfer taxes and other costs may be withdrawn from the 1031 exchange intermediary account. Make sure to discuss and verify with your qualified intermediary.
We also do not recommend waiting until the last days of your identification period to select a property. This can pose major risks and challenges for the purchaser. Due to the nature of like real estate swap and property exchange identification, the investment assets available are wide. There are plenty of real estate assets to select.
Getting started with your 1031 exchange in a timely fashion is critical. At JSG Realty, we pride ourselves on walking you through the entire process and spending the necessary minutes to explain all crucial steps in this transaction.
Our goal is to make sure you purchase a safe and secure 1031 exchange investment property.
Please contact us for more information!