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When it comes to 1031 exchanges, the rules and regulations are very specific and must be followed precisely. Failure to follow these rules can lead to costly penalties. Here are some of the most common mistakes investors make when it comes to 1031 exchanges:
1. Not exchanging for a like-kind property – The exchanged property must be of “like-kind,” which means that it should be similar in nature or use. This can include raw land, commercial real estate, apartments, single-family homes and other properties that would have the same value regardless of their current condition or location.
2. Exchanging into multiple properties – According to IRS regulations, you cannot exchange more than three different replacement properties as part of a 1031 exchange. This is often called “Triple Netting.” Additionally, the taxpayer must receive all three properties within 180 days of disposing of the original property.
3. Not completing an exchange within 180 days – The IRS requires that investors complete their 1031 exchange within a specific timeline, which can be as short as 45 days from the date of sale to identify potential replacement properties and up to 180 days post-sale to close on them.
4. Exchanging with a related party – The IRS does not allow an investor to exchange into a property owned by someone who has a relationship to them, either as family members or business partners.
5. Not getting a Qualified Intermediary – A qualified intermediary is an essential part of any 1031 exchange and
It’s important to be knowledgeable regarding the rules and regulations associated with 1031 exchanges, as well as how to properly execute these trades. Experienced real estate professionals can provide guidance and assistance throughout the process, and help ensure that your transactions are completed correctly and on time. With proper planning, 1031 exchanges can be valuable tax savings tools for investors. Be sure you understand all of your obligations before entering.
