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ARTICLE -
Commercial 1031 Exchanges - Why Not Do Them? by
Robert Poe A 1031 Exchange
allows an investor to defer income taxes on the
sale of investment property by replacing it with
“like-kind” property. There are strict time
limits with 1031 Exchanges: you have 45 days to
identify replacement properties after selling
the original property and you must close the
purchase on the selected property within 180
days.
So, even though
you have to jump through a few extra hoops,
deferring capital gains taxes is worth it,
right?
Sometimes it is
and sometimes it isn’t. It all depends on the
market and your financial situation. Here are
just a few examples of when you might consider
NOT doing a 1031 Exchange:
1. How’s the
Market?
When the market is relatively stable - i.e.,
it’s neither a buyer’s market or a seller’s
market-it’s probably a good time to do a
1031 Exchange. You shouldn’t have a
difficult time selling your property or
finding replacement property in the allotted
timeframes. But what if it’s a seller’s
market? There’s no problem selling your
property; however, you could face
difficulties finding a replacement property
. . . and you’ll more than likely pay top
dollar for it.
2. What’s
Your Financial Situation?
To purchase investment property these days,
you must have a down payment (usually at
least 10% for a residential property up to 4
units, but more for a commercial property).
Will you have the required funds to purchase
your like-kind property? Or perhaps you need
to sell your property to realize liquidity.
Paying capital gains taxes may be a better
option than a 1031 Exchange. In addition,
the fees associated with a 1031 Exchange
could outweigh its advantages. A CPA will
help you determine the best strategies for
you.
3. Do You
Want to Continue Investing?
This is pretty straightforward. Either you
do or you don’t. The bottom line is that if
you do, the market should be one of your top
considerations (see item 1) before you make
the decision to do a 1031 Exchange.
There are other
things to consider when determining if a 1031
Exchange is the right decision. A visit to your
CPA should be your first move.
- Submitted by
Robert Poe, CCIM, Certified Real Estate
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