Last updated on December 7th, 2022 at 11:59 pm
Today I’m going to tell you about the five mistakes to avoid in a 1031 Exchange. A 1031 Exchange is when you sell one property, that’s been held for investment, and buy another property that you will hold for investment, under very, very specific rules and timetables. The reason you do this is to postpone, maybe even forever, the taxes that you would owe on the sale of your property.
Mistake #1: Touching The Funds
The first mistake is touching the funds. This means you have to handle the funds from the sale of your property, to the acquisition of the new property, in a special way. The only entity that can touch those funds is a “Qualified Intermediary” or Accommodator, which we’ll discuss in other videos. But you may not touch those funds. They have to go directly from your Escrow or Closing Officer to your Accommodator to the purchase of the new properties.
Mistake #2: Holding Property Less than 2 Years
The second mistake is holding the property that you’re selling for less than two years. Some accountants will say two tax years, some will say two years. Be conservative before you sell.
Mistake #3: Buying Property Too Early
The third mistake is buying your new property before you’ve sold your old property. This can be done in something called a Reverse Exchange, but it’s fairly nuanced. Stay out of it unless you want to be complicated.
Mistake #4: Changing The Ownership Name
The fourth one is changing the name of the owner from selling to buying. An example would be if you are holding the property that you are selling in the name of John and Suzy Doe. Do not change it to an LLC, or Jim and John Doe, or something different. It has to be the same owner when you sell, to the ownership of when you buy.
Mistake #5: Doing It Yourself
Number five is doing it yourself. That will totally jeopardize your 1031 Exchange. And you will very probably end up paying taxes instead of saving money on your taxes. So you want to call your accountant, your attorney, your real estate broker that understands 1031 exchanges, and your Escrow Officer that understands the procedure in a 1031 Exchange.
If you don’t do that, you run the risk of jeopardizing your Exchange and paying your taxes, when you went through so much trouble to postpone your taxes.
I had a situation just recently where one of my Facebook friends who is a real estate broker, and does a lot of transactions, decided that she would not touch the money, but she put her funds from her Closing into her LLC in the bank account. Separate bank account. She did a lot of things where she literally did not touch the funds. It went right into the bank account, and then she had the bank account buy the new property.
However, when you do that, it really means that you’re working with an, with an entity that is related to you. And so you can’t use that entity. And you need to work with the professionals. She did work with an actual professional. Her accountant said you have to do a 1031 Exchange. Her attorney said you have to do a 1031 Exchange. However, they didn’t tell her all of the exact conditions that she needed to follow in order to save money on her taxes.
And now she’s panicking, because it’s costing her more than she actually has. So don’t do it yourself.