What a Boiling Real Estate Market Means for 1031 Exchanges

NEW YORK – March 1, 2022 – (Newswire.com)

iQuanti: Homes receive multiple full price offers within days of listing, supply is at an all-time low and demand for properties continues to rise. These are just a few signs of a hot real estate market. In a seller-driven market, investors may struggle to find new properties. And when an investor tries to execute a similar exchange, there’s added pressure to quickly identify suitable replacement properties.

Let’s dive deeper into how 1031 exchanges work, if they’re impacted by a booming real estate market, and how investors can ensure a smooth and similar exchange.

How does a 1031 exchange work?

Based on IRS code 1031, a like exchange is a process of selling an existing property and using the proceeds to purchase a similar property. This helps the owner defer capital gains tax by transferring the proceeds directly to another property.

Are 1031 Exchanges impacted by a booming real estate market?

When properties take off the market quickly, that’s good news for sellers. This often means that the initial sale of a property in a like-for-like exchange is not the issue; it’s securing a similar new property that can be a challenge.

The investor making the exchange must identify up to three replacement properties within 45 calendar days of the closing of the sale. In a hot market where properties are scarce and go fast, you might find yourself constantly updating the listing all the way to the 45th day. But at that point, you are forced to buy one of these three properties, or you will lose the protections offered by the IRS code.

How to ensure a smooth exchange of the same nature in a hot market

Investors must be prepared to act quickly to close a 1031 exchange in a hot market or risk ending up with a poor or unwanted property down the line. The following steps may help:

  • Find the right qualified intermediary: It is against IRS rules for you to do a 1031 exchange as an investor. Thus, finding a qualified intermediary is essential to protect the exchange in order to maintain its tax-deferred status. A great intermediary can help you stay on track to meet deadlines, complete necessary paperwork, and follow all IRS rules to complete the exchange on your behalf.
  • Choose a replacement and contract quickly: There is no need to submit a list of replacement properties if you complete a transaction instead. If you’re ready to jump on a replacement property quickly, you might be able to close the deal within 45 days. But as a precaution, you might want to keep a few other properties in mind in case the first deal fails.
  • Talk to a real estate agent about the alternatives: A real estate agent may be better equipped to make recommendations on completing a 1031 exchange in a tight real estate market. They can also advise you on other options, such as a 1031 reverse swap or an enhancement swap.

The essential

The 1031 exchange is a smart way to defer capital gains on real estate investments. But a boiling property market could mean investors are struggling to identify great properties in which to upgrade. To battle the market, investors can benefit from working alongside an excellent real estate agent who can help locate eligible exchange properties and help execute deals quickly.

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What a Boiling Real Estate Market Means for 1031 Exchanges

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