Can one turn a 1031 real estate property exchange into a family business?

Posted in Family Business

Can one turn a 1031 real estate property exchange into a family business?

Having a family business might be a lifesaver for many, especially in terms of finances and time. A notorious alternative, and quite profitable is 1031 real estate investments. DST structure lets the investors exchange commercial real estate properties, without perceiving any kind of taxes. But in order to have the ability to make this kind of investments, you first need to know some facts about them.

 

They are exclusively for business purposes

And you need to pay close attention to this, because you cannot exchange your house with another one estimated at the same market value. 1031 is exclusively designed for business purposes, although many do apply it to holiday properties in exotic locations, it is generally designed for businesses, regardless of the domain.

The properties exchanged must be “like-kind”

The tax code clearly states that both properties you exchange must be “like-kind”. But this does not mean what many think. It means the value of the properties must be similar, not the type of properties exchanged. This allows investors to play with the type of properties they manage, depending on how the market evolves. An office building can be swapped for a silo of farmland, if this is what the investor thinks will boom in the following years.

Always work with intermediaries

As a rule of thumb, you cannot find yourself in the property of the money resulted from selling one property. Otherwise, it will become taxable. Even if there is a small difference of value between the two properties and you agree with the other owner to pay it in cash, or via a bank transaction, the difference also becomes taxable. Also, the process can become a bit complicated and it would be ideal to have a constant collaborator to work with in this matter.

You have to stick to a limited timeframe

There are two terms you must meet in order to accomplish a transaction like this. The first one is to identify at least a property for swap within 45 days from the moment you sell yours, and from the same point, you have 180 days for sealing a deal with one of the owners of the properties identified. It might not be ideal to work within a strict timeframe, but even if you succeed to identify two properties, this is considered to be more than ideal in the branch.

Tax deferred, not tax eliminated

There is a confusion between those unfamiliar with this kind of transactions. They think their properties won’t be under any type of tax. However, what 1031 does is that allows investors to invest in other properties the taxes perceived for the first one. This expands the opportunity to grow on the market in this domain and make further profitable transactions.

Make sure you choose your intermediaries wisely, because they will make the difference between a successful transaction and one that is not that much successful. Also, you will need their help to hanle the money resulted from your transactions.