The 1031 Real Estate Exchange is a dynamic tool for real estate investors and helps to defer the capital gains tax for a long while.
The 1031 Real Estate Exchange is applicable when using the sale of income property to purchase another income property. The sale and purchase must be completed in a specified time period.
You, as the real estate investor can never have any control over the proceeds from the real estate sale. The money from the sale of the first property is placed in trust with an intermediary. This intermediary is supposed to collect and hold the money from the buyer of the first property and transfer it to the seller of property number two. In recent years, however, there have been problems with the intermediaries.
Some of the intermediaries have been disappearing with the money they were supposed to be transferring. Others often co-mingle clients money into one account. If there is a problem with a single transaction and those monies from that transaction are frozen, everyone else’s money in that account gets frozen along with it.
The transfer of the money from sale to purchase must take place within 180 days for the real estate investor to avoid capital gains tax. If the intermediary doesn’t make the transfer on time, the real estate investor is assessed full capital gains on the sold property.
The 1031 Exchange is a great opportunity for real estate investors, and many more of them should be taking advantage of the tax break. There are, obvious drawbacks to tying your money up in a1031 Real Estate Exchange, but you can address the risk potential.
To lessen the risk of your money getting stolen or frozen, you can insist that the intermediary deposit your funds in a single account, with no ties to the intermediary’s personal funds or any other exchange dealings. Then simply see that the account is labeled so as to have your (the investor) name, social security, or tax identification number tied to it with a provision that the money is for the person to act as your intermediary. You can do this without being considered in possession of the money or in violation of the exchange restrictions. All it takes is a trip to your bank with the intermediary to set it up.
Dealing with your bank, rather than one chosen by the intermediary, makes the holding of the money prior to transfer a less risky operation for you. Your bank knows you and will realize that this money is being held for you and will only be released by the intermediary to buy your income property.
By doing this, you are better guaranteed that the money will securely pass from the intermediary to the seller without any funny business.