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1031 Exchange Benefits & Best Practices

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05-08-2017 02:58   Michael Bull, CCIM

The increased returns from a 1031 exchange can be enormous. For example, imagine if you sold a $1.5 million property with a $500,000 loan and your tax bill is only $150,000. On a non-1031 sale, after paying your taxes, you will have $850,000 to reinvest. With a 1031 Exchange, you are able to reinvest the full $1 million boot. This means that in choosing to go with a 1031 Exchange, you are now able to reinvest an additional $150,000. If the cash-on-cash return on the replacement property averages 10% per year over the next 5 years, the difference in just cash flow alone over the next 60 months is approximately $75,000. The larger property also offers added returns from the increased principal reduction, the increased appreciation from inflation and the larger profits when you eventually sell the more valuable property!

Best Practices

At Bull Realty, we stand by our best practices to add value to your 1031 Exchanges. Below are a list of some of the best Practices for a 1031 Exchange.

  1. Start looking for replacement property at least by the first day your relinquished property goes under contract. Don’t wait until the closing.
  2. Engage a broker who specializes and is knowledgeable in your preferred property type as early as possible, preferably before you start marketing your relinquished property
  3. Make sure your broker has all the available property search systems, research systems, and property owner databases needed to effectively identify as many possible replacement properties as possible
  4. Be sure your broker utilizes a team of brokers assisting in the search to ensure you have a very large choice of replacement properties.
  5. In the beginning, agree to an appointment with your broker at the same time, at least once a week, every week while you are looking for replacement property.
  6. Do not use the 45-day identification deadline period as your deadline to have property under contract. You should have completed as much due diligence as possible on under contract properties prior to the ID date.
  7. Understand the offer form or purchase and sale agreement you will most likely use when making offers. Do not wait until you find a suitable property to start an understanding of the most likely used offer format.
  8. Due to the varying complexities of specific deals, always hire an attorney and 1031 intermediary as well to assure 1031 legal compliance and asset protection.

Through helping thousands of 1031 investors over many years, we have seen what investors do right and what investors do wrong. To discuss best practices for your 1031 exchange, contact Bull Realty at info@bullrealty.com.

Michael Bull, CCIM, is host of both America’s and Atlanta’s Commercial Real Estate Shows, heard around the country on radio stations, iTunes, YouTube and the CREshow.com. Michael is an active commercial real estate advisor licensed in nine Southeast states with Bull Realty, a commercial real estate sales, leasing and advisory firm headquartered in Atlanta. Contact Michael via Michael@BullRealty.com, Twitter, LinkedIn or 404-876-1640 x 101.