Surprising as it may sound, taking on the US government as a business partner in commercial real estate is an excellent business move. It lets you exploit some of the lesser-known parts of the Tax code to grow your real estate empire.
Many savvy investors are taking up the government on its offer, which in part explains the popularity of 1031 property exchange in Idaho.
No red tape
Long queues, extended waiting times and endless paperwork are some of the things that jump to mind when you think of government services. This isn’t the case when carrying out a 1031 property exchange. In fact, you’ll never set foot in a government office at any one time.
Part of the requirements of a property exchange is that you hire a qualified intermediary. On retaining their services, the intermediary handles all aspects of the swap to ensure the process follows all the guidelines. Attempting to bypass this step can nullify your eligibility.
Since a 1031 property swap is a time-sensitive process, it must be concluded within six months. As such, it’s in your best interest to hire a seasoned expert to handle the process for you. Otherwise, you lose out on all the benefits that come with it.
A boatload of benefits
One of the biggest advantages of a property swap is that it allows you to defer property gains tax when selling a property. The rider here is that you must invest the entire sales proceeds back into commercial real estate. That might sound like a deal-breaker but it confers long-term advantages.
Deferring capital gains taxes leaves you with a bigger purse when making the next acquisition. That means you can buy a bigger and better commercial property, which translates to higher monthly rental income. It also reduces the amount of money you have to borrow from the bank to let you build equity faster.
The replacement property can be anywhere in the country or in any commercial real estate sector. That allows you to diversify your portfolio holdings as well as their location. You get to spread your risk and cash in on emerging markets.
Some precautions for better results
The biggest downside of a 1031 property exchange is that you have 180 calendar days to sell your current property holding and buy a replacement property. Matters compound if purchasing a series of replacement properties spread across the country and various commercial real estate.
Any delays reaching an agreement with the sellers can affect your ability to meet the six months deadline. Working with seasoned qualified intermediaries often helps to speed up these smaller processes to ensure you’re not time-barred.
They ensure that you abide with all the requirements of the 1031 process, including the value of the replacement properties. The cost of the new acquisition should match the value of the current holding or at most, be double its value.
The government is committed to helping commercial real estate investors succeed in their ventures. Through 1031 property swap, Uncle Sam allows you to defer capital gains taxes if you use the money towards buying an even grander commercial property. Making this process part of your investment process can help you grow and diversify your portfolio while lowering your risks.