1031 Exchange – Pitfalls

In a 1031 exchange (STARKER exchange) process allows an owner to sell one investment property and buy another similar (“like-kind”) property whilst avoiding U.S. capital gains tax.  The major pitfall occurs when an exchange is audited and disallowed. The penalty standards include the income tax related to the sale of the relinquished property and the penalty and interest imposed on the underpayment of taxes.

Here are the salient aspects of this tax rule, in very basic terms:

• Identify the replacement property within 45 days and complete the transaction within 180 days.
• The replacement property must amount to an equal or greater value than the one sold.
• 1031 exchange eligibility is completed by fulfilling any one of 3 further rules, the Three-property rule, 200% rule, or the 95% rule.

Triple Net Investment Group brokers will help you make the absolutely right investment that will meet all 1031 exchange criteria. Our experts will also suggest an appropriate intermediary. Moreover, Triple Net Investment Group expert advisors will help you deliberate pitfalls in a 1031 exchange, such as:

• Choosing the right properties: The investor must be very careful when choosing multiple properties under a 1031 exchange. Choosing the right properties, which will specifically fulfill the Three-Property rule, is very important. This rule – the most popular rule in use – covers three of the properties chosen, regardless of their value.

• Establishing clear property title: The exchange intermediary must be vigilant about establishing the true owner of the property before proceeding. This will help to screen and verify ownership of investment properties, avoiding fraud and title clouds.   
  
  
• Receipt of excess funds: it is permissible for the 1031 exchange agent to return to the exchanger, the proceeds of the sale exceeding the value of the replacement property. This is, however, possible only if the investor has completed the transaction or, does not have enough funds to conduct another purchase. Under all circumstances, the 1031 exchange investor should keep a proper receipt of the excess funds for future use.

Interested in a 1031 Exchange? Contact the experts at Triple Net Investment Group for more information.