1031 exchanges, often referred to as like-kind exchanges, are a great way to defer capital gains taxes when buying or selling a property. Provided that you stay within the requirements of 1031 exchanges, the process can be of huge financial benefit.
However, if you fail to fully comply with the regulations, the situation can become complex quickly, and you may become liable for capital gains taxes. The following are some of the most common complications associated with like-kind exchanges.
The property must be replaced within a given time frame
Choosing a new property to invest in is a difficult decision, but if you are engaging in a 1031 exchange, you will need to do this within a given time frame. After the day of selling your initial property, you must designate the property that you intend to acquire within 45 days.
You will be under pressure to close on your new investment
In addition to the necessity of closing on the new property, you will need to close on the property within six months of the initial sale. If you do not achieve this, you will face complications in qualifying for a 1031 exchange.
If your mortgage goes down, you will be subject to tax
If you purchase a new property for less than the value of the old property, the total capital gains will be subject to tax, regardless of whether you receive cash or a reduction in liability.
If you want to avoid complications regarding your 1031 exchange, it is important that you conduct thorough research into being compliant with the regulations.