As a real estate investor, acquiring or selling property via a 1031 exchange can provide you with some nice tax advantages. If executed properly, you could reduce – or even eliminate – taxes on what could otherwise be a substantial IOU to Uncle Sam.
Using a 1031 exchange, a real estate investor can sell a property that has appreciated in value and not be required to pay capital gains tax on that property’s gain, provided that the investor purchases another property that is of “like kind.”
Yet, while a 1031 exchange can be a great way to defer your capital gains taxes on real estate, if the transaction is not done carefully, it could end up backfiring. Some of the biggest mistakes that investors can make with 1031 exchange transactions include:
- Not purchasing a property of like-kind. First, the properties that are both sold and purchased through a 1031 exchange must be considered of like-kind. This means that if an investor is selling a single family home, he or she cannot purchase an apartment complex and still take advantage of the tax benefits of this type of transaction. Rather, the investor must purchase a property type that is similar to the one being sold.
- Not abiding by the time line. There is also a 45-day window of time in which the new / replacement property must be identified by the investor. In addition, the new property must actually be purchased within a 180-day time frame.
- Not working with a 1031 exchange company that meets certain criteria. While there may be many real estate agents who say they can assist with 1031 transactions, it is always best to work with a rep or a company that specializes in this type of real estate exchange. Otherwise, you run the risk of “undoing” all of the tax benefits if it is later determined that not all of the requirements were met.
If you already own rental real estate – or you’re considering building up a portfolio soon – having a property management team can allow you to delegate the mundane day-to-day tasks like rent collection and property maintenance, and to instead focus on other more pressing needs.
For more information on putting an experienced property manager in place for your Orlando and / or Central Florida real estate investments, just give us a call.