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1031 Exchange Rules & How Does it Work?

Some of the savviest real estate investors have taken advantage of the 1031 exchange to grow their net worth and improve their portfolios. The 1031 exchange is a convenient procedure that enables you to swap an investment property for another of the exact nature while you put off capital gains tax. This program only succeeds if all its requirements are met, regardless of whether the like-kind property an investor picks has equal or greater value.

Are you looking to learn more about the 1031 exchange? Worry not! This blog post will discuss the rules of a 1031 Exchange and how it works. Keep reading!

1031 Exchange Rules

The 1031 exchange comes with several rules that property investors must follow to enjoy the program’s perks. These are:

180 Day Rule:

This is another rule that real estate investors must adhere to when using this common tax strategy. They must close on the newly-acquired property within 180 days after selling the old one.

One noteworthy aspect of these two 1031 exchange rules mentioned above is that the periods run simultaneously. Therefore, one must start counting the days immediately after the successful sale of their initial property.

200% Rule

This rule of the 1031 exchange permits investors to identify as many replacement properties as possible, but there’s a catch. Their total value should not exceed 200% of the original property’s value.

How the 1031 Exchange Works?

A 1031 exchange is a process that entails several steps. Here are some of the things that the property investor should do when performing it.

  • Make up their mind about selling their property and opt for the 1031 exchange.
  • List the particular property for sale.
  • Start looking for worthwhile replacement properties.
  • Choose a reputable intermediary.
  • Begin negotiations with potential buyers, evaluate offers and settle for the best one.
  • Close on the sale of the old property.
  • Select up to three replacement properties within 45 days.
  • Sign an agreement on the first-choice property they choose.
  • Close on the desired replacement property.

The 1031 exchange procedure is pretty straightforward, right? This is partly why most property investors don’t mind doing it time and again. It is the perfect way to defer paying taxes and build wealth faster than if they paid the required taxes every time they acquire a new property.

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