People who are looking to sell their investment property at a significant profit are soon faced with the question of “How do I replace that income with a better asset?”
Almost every property owner has a goal to “trade-up” into a more attractive property, even though certain market conditions can make that seem like an overwhelming task. However, there are ways to achieve a successful exchange of properties with the right preparation. As with any big decision, it is important to take your time, do your research and be prepared to act when the right time presents itself.
Before you engage in the process of selecting your ideal 1031 investment property, remember that in its simplest form, a section 1031 exchange involves a swap of properties that have equal values. This 1031 investment does not provide a true forgiveness of the tax, instead, the gain is deferred.
In this type of investment, you are looking for properties that can be identified as “like-kind.” There are very specific requirements for identifying and acquiring potential like-kind replacement properties for your 1031 exchange investment. (For more information on these requirements click here.)
How to Choose a 1031 Investment Property
Read through the following 3 readiness tips before selecting your 1031 investment property.
Take Your Time
When it comes to real estate investing and choosing your 1031 properties, it is important to take your time preparing for your 1031 exchange. A 1031 exchange property purchase is not something that should happen overnight. Spending some time early on in order to find a suitable replacement property is essential. Although the 45-day identification period can go by quickly, you should remember that 1031 investment properties are all about the long term.
Do Research and Identify Preferred Properties
A real estate purchase is a major decision to make. Before committing to the purchase of a property, always make sure that you do research on the local area and always make sure that you are confident that the deal is a good one to make. Having a clear set of criteria for the desired exchange asset is key.
For example, decide if you prefer restaurant properties, banks, medical facilities or some other type of tenant. What are the location requirements? Are you interested in adding capital to your relinquished property so that a larger property can be acquired? If you start with a very focused set of requirements, you can expand the criteria as needed.
Always be Ready
Even though the investment properties you are considering should be well-researched and carefully selected, it is also important to always be ready to make a purchase. When you do find a property, you do not want to have to wait several days or weeks to get your financing plan approved. It is a good idea to have financing completed at the start in order to make a quick deal when the time comes. Additionally it could be a good idea to identify a Delaware Statutory Trust (DST) as a potential backup plan should your other identified properties not pan out. If you have ever had to deal with real estate transactions before, you know the process can be tedious, but if you’re prepared ahead of time, you will be able to respond quickly to the 1031 investment opportunity.