How to Beat the 1031 Exchange Clock
A 1031 exchange allows you to defer paying taxes when you sell an investment property by reinvesting the proceeds in a qualifying replacement investment property under the Internal Revenue Code Section 1031.
While using a 1031 exchange may help you defer capital gains tax, grow your wealth and increase your cash flow, there are some significant hurdles along the way that must be overcome. Let’s take a closer look at what these challenges are:
Challenge 1: Finding the Right Property within 45 Days
There is an initial 45-day period to identify a replacement property, and the clock starts ticking from the moment you sell your property. The IRS is very strict about enforcing its deadlines, and it does not provide extensions for 1031 exchanges. Missing the 45-day deadline amounts to relinquishing the opportunity for a 1031 exchange and having to pay taxes on your sold property.
Now, consider all you have to accomplish during this 45-day period: You have to examine a number of candidate properties in order to determine which, if any, makes for a good investment property. This involves analyzing the real estate market at the property’s location, appraising the property, and estimating the potential passive income that the property is likely to generate. If there’s a property management company or real estate development company involved, you will also need to vet it.
Furthermore, if you want to defer all the taxes on your sold property, you will need to find a property whose purchasing price is equal to or greater than the proceeds from the property you sold. This is because if less than the full amount of the sales proceeds is put into a replacement investment property, you will be liable to pay taxes on the amount that was not reinvested.
Challenge 2: Closing within 180 Days
After the 45-day period to identify a replacement property, you have another 135 days to reach closing on the purchase of that property (for a total of 180 days from the day you sold your property). During this period, you will need to complete the due diligence process and negotiate with the seller of the property. With the 180-day closing deadline encroaching, you may end up being more flexible in negotiations, resulting in less favorable deal terms for you. Another thing you will need to accomplish in this timeframe is financing. If you paid off your mortgage at the sale of the relinquished property, you will have to take out a mortgage on the replacement property for an amount equal to or greater than the amount paid off.
Overcoming the 1031 Exchange Challenges
The first thing to note is that according to section 1031, the investment of the proceeds from your sold property may be divided among multiple properties and may even be invested in equity shares of a much larger group project. This opens up an interesting possibility, which can facilitate overcoming the challenges involved in 1031 exchanges.
iintoo, which operates as a REIMCOTM (Real Estate Investment Management Company), enables investors to purchase ownership shares across multiple projects, thereby diversifying their real estate portfolio across high-value co-owned properties without the burdens of handling the property management on their own.
How iintoo Can Help
Unlike other companies, iintoo does much more than connect investors to real estate project sponsors. It also provides investors with the bridges needed to overcome 1031 exchange hurdles.
Being strategically partnered with Meridian Capital Group, America's preferred mortgage advisor and largest debt broker, iintoo has a diverse real estate portfolio of pre-vetted offerings. These range from income-generating multi-family properties to retail and office building development. Moreover, iintoo carefully examines each investment opportunity by personally vetting the project’s developer, building permits, construction plans and revenue forecasts. It works directly with project developers to create pre-approved business plans for maximum potential returns. iintoo also offers complete project oversight throughout the investment’s life cycle, including site visits, progress reports and the handling of quarterly returns.
All of this means that by choosing iintoo you can overcome both 1031 challenges in one fell swoop. iintoo offers a wide range of quality candidate replacement properties among which you can divide the proceeds from the sale of your property. Moreover, iintoo does most of the vetting, due-diligence, and negotiation. Think of it as having your own professional entourage, specializing in real estate investments, during the entire 1031 exchange process.
* Neither iintoo, iintoo GP LLC, nor Dalmore Group LLC give tax or legal advice, therefore you should review any planned financial transactions that may have tax or legal implications with your personal tax or legal representatives or advisors.