If you are holding a property as an investment then using a 1031 exchange can help you trade up or change the type of investment. For example you can change from a residential property to a commercial or a mix of properties. There are just some simple rules to adhere to.
The property sold must be "held for investment" or productive use in a trade or business. You can have all sorts of properties as an investment, apartment buildings, office buildings, multi-family dwellings, retail centers, single family rentals, vacation homes, condominiums or raw land. You can sell one type and purchase another type, for example you can sell a retail center and purchase several apartment or multi-family homes or a mix, or the other way round.
You must identify one or more replacement properties to be purchased within 45 calendar days following the sale. An easy way to do this is the Three Property Rule. The Three Property Rule is to identify up to three properties to be listed as replacements. The investor/taxpayer does not have to be in contract in 45 days although this would definitely help you to complete the final step that needs to be completed in 180 days.
Within 180 days of the sale the investor/taxpayer has to purchase one or more of the identified properties. To do this funds need to be handled by an intermediary who is qualified, your REALTOR, attorney or CPA cannot perform this role. There are several companies that handle all the paperwork for the exchange and hold the funds following the sale until the replacement property is purchased.
There are several things you want to think about when choosing an intermediary, experience, security of funds, service and price.If you have further questions about this investment strategy feel free to contact me, we are planning a seminar on this topic later in the year when we will have a speaker from one of these intermediary companies.
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