5 Tips To Ensure a Smooth 1031 Exchange Process

5 Tips To Ensure a Smooth 1031 Exchange Process
Written By
Carl E. Sera, CMT
Published On
July 25, 2023

A 1031 exchange can offer numerous benefits to investors, but it can also become overwhelming. Check out these five tips to ensure a smooth 1031 exchange process for investors.

Sign Exchange Documents Before Closing

The 1031 exchange rules state that investors must sell their relinquished properties and acquire replacement properties later. By signing exchange documents and strictly following 1031 exchange regulations, it becomes an exchange instead of a sale and purchase.

Investors must sign essential exchange documents before or on the closing date of a relinquished property. Additionally, they must follow up by signing a document outlining their assigned rights under the contract, giving the seller notice.

Stay Up-to-Date on Deadlines and Rule Changes

Working with 1031 exchanges requires knowledge of legal jargon and regulations. Furthermore, 1031 exchanges need investors to move swiftly throughout the process; they have 45 days to identify a replacement property, then close on said property 180 days from the original sell date.

Performing a 1031 exchange around Tax Day can add stress, as investors must close by the given tax deadline for the original sale year. If deadlines remain unmet, investors cannot qualify for capital gains tax deferral. Lastly, monitoring tax code changes can impact regulations and rules around 1031 exchanges.

Consider the Expenses

Before moving into a 1031 exchange, you should consider some expenses that go into the process. For instance, some costs can include escrow fees, transfer taxes, brokerage commissions, and exchange fees. So, investors must come with their funds if they want to avoid taxes.

Work With a Supportive Team

Because the 1031 exchange consists of multiple moving parts, it can quickly become overwhelming and stressful to keep track of for a single investor. So, one tip to ensure a smooth 1031 exchange process is to work with a team of experts that offer guidance throughout each of the steps of the exchange.

Qualified individuals to work with include financial advisors, Qualified Intermediaries, and experienced commercial estate attorneys. These professionals can help with paperwork for successful transactions, inspections, and placing debt into replacement properties.

Create a Backup Plan

Sometimes, a 1031 exchange plan may fall apart when least expected. Always have a backup plan to ensure a successful 1031 exchange. It’s crucial to meet 1031 exchange qualifications, even in instances of plans not working out.

Investors can scramble to find last-minute replacement properties, leading to less-than-ideal investments. Investors should use the 3-Property or 200% Rule to identify a plausible investment alternative.

Sera Capital allows people with highly-appreciated assets to defer capital gains tax and expand their investment portfolios. Our DST 1031 exchange services help investors defer capital gains tax on investment or commercial real estate for people who want to unwind their real estate responsibilities and holdings. For more information, contact us at Sera Capital today.

Carl E. Sera, CMT

Carl E. Sera, CMT

Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 14 years of experience in the financial services industry with a focus on investment management.

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