By Camille Renshaw, CEO, B+E
Unless you work in real estate every day, you likely don’t know what a 1031 exchange is. Simply put, a 1031 exchange (also called a like-kind exchange or a Stark exchange) allows you to sell a real estate property and swap into another real estate property, while deferring any capital gains tax. Obviously if you are selling a property, avoiding the payment of capital gains tax is pretty exciting. It allows your underlying investment to continue to grow tax deferred. There’s no limit to how many exchanges you can do, so you can continue to avoid the tax until you decide to sell a property and keep the cash.
That said, the specific rules for a 1031 exchange are complex. Consult your CPA and an experienced real estate broker if you decide to complete one. First, let’s review the basics:
- Day 1: Don’t touch the money. Upon closing, per the IRS, sale proceeds from the relinquished property are placed with a qualified intermediary (QI). You can’t have the funds in your possession for even a moment. Ask your title insurance company or closing agent if they offer this service.
- You must find new property within 45 days. The IRS requires that you name the property you are swapping into within 45 days of relinquishing the original property. The IRS allows you to name three properties for every one you purchase, or to use the 200 percent rule. Ask your CPA or a senior broker for more details. You will need great efficiency to meet the IRS deadline, as well as assurance that you’re getting the best deal possible.
- Close within 180 days. Period. When you sell your relinquished property, the 180-day timeline commences on the relinquished property’s closing day.
- Not a good time to learn on the fly. Finding replacement property is difficult. For example, a family can easily find a couple of pharmacy properties for sale online, but there are nearly 200 Walgreens properties on the market right now. How do you know which Walgreens is the best one? What are typical lease terms for this tenant? What is the tenant’s newest store prototype? Normal store sales? What price will it likely resell for in several years? What debt is best for that property?
- Hire a buyer’s broker who represents you exclusively—listing brokers represent the seller. Above all, hire a senior broker who transacts daily within the national real estate market. Interview and ask for recent sales and case studies. How many years of experience do they have in your property type? Ask for references. What search tools they will use—manual tools, tech-enabled ones or both? What is their success rate? At B+E, our senior brokers expect tough questions from new clients and come ready to help.
- Have a clear communication plan for the whole team. What deal management tools will you use to make the process easier and less stressful? Using B+E’s online platform, buyers can work with a B+E broker and create a team—family members, their broker, attorney, CPA, lender etc.—who can view web-based dashboards together and collaborate on property purchases, vastly improving communication. The team can establish tasks for each person regarding their role in the exchange and push to their phone’s calendars. B+E automatically updates search criteria, equity and debt ratios, NOI and ROI metrics, due diligence checklists, tenant news and credit searches and deadlines.
- Create a solid criteria. Do you want NNN property with few responsibilities? Do you prefer tax-free states like Florida, Texas, Tennessee, Nevada and Washington? Do you like retail or industrial? Defining your asset, credit and income criteria, as well as outlining milestones, is very important. A good broker should provide a diligent and adaptive process to increase the probability that you achieve your trade goals. The broker’s process and logic should be very clear to you from the beginning.
- Week One: Compare thousands of properties virtually and intelligently. Many online resources are available that your broker can use – LoopNet, CREXI, CoStar and more. If you are seeking a single tenant, NNN property, B+E offers the only trading platform for NNN property, enabling you to search by tenant, credit and lease term, while sharing online dashboards with your dedicated broker. The B+E platform contains 3,500-5,000 active listings daily, via its AI-driven system that sweeps the U.S. market in real-time and then criteria-matches to your search.
- Week Two: Create a shortlist and make initial offers. Once you have established the criteria, B+E’s trading platform will source thousands of on- and off-market properties for you to review, shortlist and select. You can submit NDAs, LOIs and contracts directly through B+E’s trading platform, or your broker can do that for you and simplify your search.
- Week Three: Compare your favorites and start writing contracts. Ask your broker to create a detailed analysis of your favorite properties, comparing cap rates, income, debt, equity, ROI, risk, rent escalations over the life of the deal and exit pricing. B+E provides this analysis simply by checking boxes beside property. You can view online or export to a PDF to share or save.
- Week Four to Six: Place property under contract before the 45th day. If you do not have control of the property you are targeting when you name to the IRS, the seller is suddenly in a very powerful position. You do not want to be subject to new demands or changes in pricing as you work to complete your exchange. Managing your timeline is key. Good advisors can make sure to meet all deadlines.
- Diligence and Closing. Compile all properties’ LOIs, executed contracts, property inspection reports, environmental studies, debt quotes, title and other documents in one shared place online. If these documents are stored in email, they are easily misplaced or lost. B+E allows document storage alongside all other 1031 Trade functionality, so the team has straightforward communication and clear goals.
Modern brokerage has evolved quickly and should enable your property purchases to be much simpler and faster. Using an experienced broker will take the friction out of the process and vastly improve the quality of the property you review and purchase.
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