Navigating 1031 Exchanges In A Low Inventory Market

According to Benjamin Franklin, “in this world, nothing can be said to be certain, except death and taxes.” Seasoned investors understand where Franklin was coming from. There are tax implications whether you hold or sell a property, and it’s always wise to consult with your financial advisor to understand your market position before making any moves. A 1031 exchange, which is a method to avoid capital gains taxes, requires an investor to swap one investment property with another “like-kind property” of the same or greater value. 

The proceeds of a sale of one like-kind property for another must be held in escrow to be used toward the purchase of the new property. If the money transfers to the seller, even for the briefest amount of time, the exchange is void. Working with an experienced team on your sale to follow the code to the letter is a must.

There are also strict timelines involved in making these exchanges work, and in this tight market that can be the death knell for your deal. To make a 1031 exchange work, an investor must have identified their target like-kind property within 45 days of their sale (in fact, you can designate more during this time, but there are only 45 days to lock down The One). You must then be able to close on the identified property within 180 days of closing.

This low inventory market makes 1031 exchanges more challenging because there is much less to choose from. Before listing it is imperative to have a clear understanding of the capital gains tax implications you would face in a sale that cannot successfully become a 1031 exchange.