Rule 1: You must exchange for like-kind property
In a 1031 exchange, your replacement property must be “like-kind” to your relinquished property. But like-kind doesn’t mean exact-kind. You don’t have to trade a farm for a farm, or an apartment complex for an apartment complex. You can exchange any business or investment real estate for any other piece of commercial real estate.
Risk: If you don’t know all your options, you run the risk of pigeonholing yourself into an exchange that doesn’t fit your needs, and you might not think about more advanced options, like diversifying your investment or exchanging into fractional interest ownership.
Reward: When you work with Bangerter Financial, you will be in a position to identify a broader range of potential replacement properties. Bangerter Financial works with you to establish your goals and choose the right property or properties that potentially lower risk and provide consistent income.
Rule 2: You must invest “all proceeds” to get the max deferral
To get the full tax deferral from your 1031 exchange, the value of your replacement property must be equal to or greater than your relinquished property. Any proceeds you don’t reinvest are subject to taxes. Additionally, the debt placed or assumed on your new property must be equal to or greater than the debt you pay off using your sale proceeds. Any debt or equity not replaced is considered boot; you’ll owe taxes on that money. You can offset debt with cash if you’d like.
Risk: Can be difficult to find replacement properties with the exact debt to equity ratios, or that you can invest all your proceeds in. This often results in taxable boot.
Reward: When you work with Bangerter Financial, you can take advantage of Delaware Statutory Trusts – fractional interest ownership options that include pre-identified institutional-quality properties. These trusts allow you to strategically diversify your sale proceeds.
Rule 3: You must adhere to the 1031 exchange timeline
1031 exchanges carry a strict timeline. From the time you close escrow on your relinquished property, you have 45 days to identify replacement properties and 180 days to close on those properties.
Risk: A lot needs to happen quickly after your timeline begins. You have to identify replacement property(ies), conduct due diligence, qualify for a loan if needed and negotiate a purchase. If you don’t watch out, failing to complete these tasks on-time could force you into a bad investment, or disqualify your exchange entirely.
Reward: When you work with Bangerter Financial, you benefit from our knowledge and years of experience managing the 1031 exchange timeline. You won’t experience timeline panic, and you will make a sound investment.
Rule 4: You can’t touch your sales proceeds
You cannot take constructive receipt of your sale proceeds during an exchange. Instead, a qualified intermediary must hold the proceeds and pass them along when purchasing your replacement property. You need to engage an intermediary before you put your property on the market, or soon thereafter.
Risk: If you don’t utilize a qualified intermediary, your exchange could be invalid. At the same time, intermediaries are not subject to any IRS licensing requirements. So, it’s important to do your research to make sure your intermediary is trustworthy and adequately bonded.
Reward: When you work with Bangerter Financial, we will refer you to one of the many trusted, qualified intermediaries we work with. They will be experienced and bonded.
Rule 5: The same legal entity must sell the relinquished property and buy the replacement property
The entity, on paper, that is selling a property must also, on paper, be the entity buying a new property. For multi-owner entities this rule can create risk.
Risk: When a multi-owner entity sells a property, and some partners want to cash out while others want to reinvest, it can complicate a 1031 exchange.
Reward: When you work with Bangerter Financial, you gain access to our network of qualified 1031 exchange professionals – including CPAs and lawyers who can help you sort out the legal and tax implications of changing ownership.