Whether you are a seasoned veteran or a new investor, selling investment property can be a daunting proposition under the best of circumstances. This is especially true when you intend to replace it and qualify the transactions under section 1031 of the Internal Revenue Code. From valuation to time constraints to “like-kind” requirements, there are many pitfalls awaiting an unwary investor.
To avoid the most common mistakes made by real estate sellers, it is important to understand all your options before you relinquish your property. While nothing is guaranteed in life or real estate, understanding the numbers goes a long way toward preparing you for a successful transaction.
Sit On The Sidelines
To avoid any confusion at all, as an investor you can simply decide to do nothing with your current property. In this way, you totally avoid dealing with Capital Gains Tax or locating a replacement property. Of course, by doing nothing you also may lose out on potential exponential growth.
Bite The Tax Bullet
You can also choose to sell and simply pay all capital gains taxes right away. You can take your remaining profits and wait for as long as it takes to find a suitable replacement property. Of course, once you pay those immediate taxes, you have far less capital to reinvest.
Opt for an Installment Sale
Perhaps the idea of spreading your tax liability out over a defined period of time is appealing. In this case, you can pay the taxes bit by bit over the life of the installment plan. However, this also means you won’t have all your capital immediately available for reinvestment.
Complete a Traditional 1031 Exchange
One of the most popular tax-deferral strategies related to real estate, you can defer all your tax obligations and retain 100% of the sale proceeds to buy “like-kind” replacement property. In fact, you can keep using the 1031 exchange strategy to buy and sell replacement properties until you die, at which point the current property enjoys a “Step Up” in basis and nobody ever pays capital gains tax on it.
Carry Out An Alternative 1031 Exchange Strategy
The sophisticated investor may wish to satisfy all 1031 exchange requirements and then withdraw up to 85% of the equity tax-free through refinancing the property. This frees up cash for other types of investment opportunities. The drawback is that high creditworthy tenants are a necessary component for these transactions to work. Any investor considering this strategy must understand whether the taxes he or she would pay on an outright sale would be greater than the 15% in equity remaining once the deal is completed.
1031 Exchange Property and it’s principal, Dr. Robert Hetsler, have been helping novice and seasoned investors alike with all aspects of 1031 exchanges for more than a decade. Whether this is your first exchange or your fiftieth, our expertise in all aspects of these complex real estate transactions will ensure your short- and long-term investment goals are met.
We offer a wide range of services to clients across the United States, including serving as the qualified intermediary for any 1031 exchange. To find out more about our qualified intermediary services, please get in touch.
We also offer a full array of licensed real estate services to help you find and close on the perfect replacement property for your 1031 exchange. To learn more about our real estate services, please visit our sister site 1031 Exchange Property for more information.
Because we cannot perform both roles in the same transaction, we maintain a robust network of highly-qualified and fully-vetted professionals – both qualified intermediaries and real estate agents – to whom we refer our clients, depending on our role in any transaction. It is our network of relationships that allows us to be a full-service provider to any investor interested in reaping the benefits of a 1031 exchange.
Whether you hire us to act as the qualified intermediary or your real estate agent, we will help you ensure the success of your investment real estate transaction.