It’s a well-known fact that 1031 exchanges are a great way for property investors to legally defer paying capital gains taxes during the process of selling a property to buy a new one.
If you want to go through a 1031 exchange when selling your property, understanding the common pitfalls allows you to avoid them. The following are some ways to help you avoid issues in a 1031 exchange.
Take the deadlines seriously
Timing is crucial with 1031 exchanges. As long as you close on a replacement property within 180 days of selling your initial property, you will probably not run into any issues. However, you should designate a replacement property option within 45 days of selling your initial property.
Make sure you defer all of the capital gains
Some investors make the mistake of buying a property that is cheaper than the sale price of their previous property. This means that they still have some capital gains left over after they buy their new investment — and this sum will be taxable.
Sign exchange documents before you close
You must decide that you want to go through a 1031 exchange before you sell your initial property. You will also need to sign exchange documents before you close. If you do not, you may not be eligible for a 1031 exchange.
When going through a 1031 exchange, you should have a strategy in place ahead of time. This will give you a full overview of the intended timeline and enable you to determine the type of property in which you want to invest.