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1031 Exchange Rules That Every Real Estate Investor Must Know (2019 Update)

The 1031 exchange is one of the most intriguing things about real estate investing. Basically, by performing 1031 exchanges and continuing to reinvest your profits from previous real estate investments, you can defer paying your capital gains taxes indefinitely. Of course, to take advantage of this tax exemption, you’ll need to know a few important rules. Otherwise, you could end up with a massive (and unpleasant) surprise from the IRS after you sell your next property.

1031 Exchanges Only Work for Investment Properties

Many people, when they first learn how a 1031 exchange works, will think to themselves, “Well, why don’t I do that with my home? I’ll just put the money I make from selling it into my next house, and I won’t have to pay any capital gains taxes…” Unfortunately, you cannot do a 1031 exchange on your primary residence. It can only be performed with investment properties.

So, if you’re planning on doing a 1031 exchange, think very carefully about your investment plan. You cannot sell an investment property and then buy a house to use as your primary residence until you decide to rent it out later, or vice versa. Both properties must be investments, not your residence (even on a temporary basis).

It Doesn’t Have to Be a One-for-One Exchange

A lot of investors use 1031 exchanges when they sell a smaller or less expensive property to buy a larger one or one in a wealthier area. This is not always the case, though. You may use the money you make selling your investment property to purchase as many new properties as you want, so long as their combined worth does not exceed 200% of the value of the property you’ve just sold.

You Don’t Have to Do the Exchange Immediately

Traditionally, 1031 exchanges are done swiftly, as you sell one property to buy another immediately. However, that’s not always possible (or even plausible) in modern real estate markets. A delayed exchange can be arranged, but you’ll just need to find a third party to hold your capital from the sale until you purchase your next investment property or properties.

But You Can’t Wait Forever – You Must Identify a Replacement Property

At the same time, you cannot simply put your 1031 exchange on hold forever. You must identify and designate a replacement property within the first 45 days after the sale of your first property. Because it’s common for deals to go south or fall through, you may designate as many properties as you want. Then you must move forward to attempt to purchase at least one of them, using the funds from your sale.

1031 exchanges could save you massive amounts of money in capital gains taxes, but keep these rules in mind before you attempt your first (or next) exchange. You want to ensure that you are operating within the law and that you are executing a legal 1031 exchange before you commit.

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The Right Way to Invest in Foreclosures (2019 Update)

Maybe you saw an advertisement for foreclosed condos for sale in Dallas, TX, and thought to yourself how fantastic it would be to get a valuable property in a booming urban area while the price was rock bottom. The foreclosure market is often full condors or apartments for sale, along with other properties in Dallas, TX And as the area grows even more, we’re sure to see a pretty consistent flow of foreclosures to tempt investors in the future.

But getting into foreclosure investing isn’t as easy as just picking up a cheap property. There are some things that you need to know to buy up those foreclosed condos in Dallas without running into any problems.

You Need a Strategy

Before you can decide exactly how you’re going to hold the investment and later resell it, you need to know why the property became a foreclosure in the first place. Apartments for sale in Dallas, TX generally don’t last long due to the rapidly growing business sector. Foreclosures could just be a unique circumstance, which is what you’re hoping for as an investor. But take a look around the neighborhood or area first, and be sure that this isn’t an indicator of a larger trend. This could affect your ability to resell the property in the future.

Leave Room in the Budget for Improvements

Most foreclosed condos for sale in Dallas, TX aren’t going to be turnkey properties. Foreclosures often bring out feelings of panic in homeowners, and you’ll frequently see foreclosed homes that have been stripped of everything – lighting, blinds, even the flooring in some cases. And if the homeowner was busy trying to keep up on the mortgage, you can bet that they weren’t spending their money on upgrades and remodels.

For this reason, be sure that your budget is big enough to cover any remodels or fixture replacing that needs to happen for your foreclosed property to appear livable.

Look for REO Foreclosures

If you can find foreclosed apartments for sale in Dallas, TX that have already been through the auction process, and haven’t been sold, you may be able to pick them up in a move called “buying REOs”, or “real estate owned”. This is the least risky way to purchase foreclosures because it’s the closet thing to a regular sale. You aren’t taking over a mortgage, or investing via auction; you’re simply purchasing a property through a real estate agency like always. With less confusing paperwork and fewer potential legal matters, you won’t have to worry about stumbling blocks along the way.

Find a More Experienced Partner

If you are a solo real estate investor interested in checking out the foreclosed condos for sale in Dallas, TX, it’s probably best to team up with a more experienced investor at first. Foreclosures offer several unique factors that have to be taken into consideration, and foreclosure auctions can be a risky way to acquire property. Lean on the guidance of an investing mentor at first, and you’ll find it much easier to succeed in the foreclosure market.

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Top 5 Tips for Identifying a 1031 Exchange Replacement Property (2019 Update)

One of the major expenses that real estate investors run into is capital gains taxes. Every time a property is sold, these taxes can create a hefty burden on your profit margin. But there’s a way around that, if the purchase falls into the right category. The IRS allows sellers to defer capital gains taxes by doing a 1031 exchange.

Under this type of exchange, the property has to be held as an investment, not as a principle residence; it has to be exchanged for like-kind property; and there are specific time frames that have to be met. Identifying situations that qualify can be tricky, but learning how to find those deals is a great way to keep your profit margins high. Here are five tips for identifying a 1031 exchange replacement property.

Tip #1: Follow the “3 Property Rule”

This rule is set forth by the IRS, and allows the investor to identify up to three possible replacement properties for the future. They have to eventually acquire one, two, or all three of the properties.

Tip #2: Follow the “200% Rule”

Within the three property rule from above, there is another rule that can make it easier to fill the quota. As an investor identifies those three possible replacement properties, their total fair market value (of all three properties combined) cannot exceed 200% of the fair market value of the relinquished property.

Tip #3: Alternatively, follow the “95% Rule”

This isn’t a commonly applied rule, but it can be in certain situations. This rule states that as the investor identifies the three properties, that total no more than 200% of the value of the relinquished property, they also agree to acquire at least 95% of the total value of the three identified properties.

These first three tips will help you narrow down the many options you may have for real estate investing. By the time you find three properties that work for your investing budget, and that meet the 200% Rule, you’re likely to have eliminated most or many of the options.

Tip #4: Be Sure You Identify the Properties Correctly

The identified properties for potential acquisition must be identified in writing. This document has to be signed by the investor, stating that all properties have been legally and accurately described. The address and legal description of the property must be present, and the percentage share of a property that has multiple investors is also required on this document.

When the property is acquired, it must be “substantially the same” as what was described in the document. The IRS can be ambiguous on what this phrase means, but in general, the property has to have the same basic nature and characteristics.

Tip #5: Make Sure the Right Person Gets the Information

After ensuring that the identifying document is accurate, the investor has to provide the information to whomever is responsible for transferring the property to the investor; alternatively, anyone involved in the exchange, like the title company or the escrow agent, must receive the document. This person cannot be a family member or the investor’s real estate agent.

These five tips will help you ensure that you’ve identified the right replacement property for a 1031 exchange.