Understanding the 1031 type of exchange

The real estate sector is much more complicated than it could seem at first glance. Ordinary people think that it is only about selling and buying properties, but this is not true, as the operations are way more complex. For instance you can actually trade real estate: you get a house and you give another one, similar in terms of value, in exchange. This happens not only in the residential sector, but also in the commercial one. As far as commercial swaps are concerned, the rule is called 1031 and has gained a lot of popularity lately. So, if you are businessperson interested in this type of real estate exchange, then you should make sure what it is about before starting looking for a trading partner. The 1031 is not something anyone can take advantage of, and this is a normal thing, as it would create a complete chaos in the industry. Read the following article to find out some basic pieces of information that will enable you to discuss advanced details later on, with your realtor or business partners:

  1. The rule is exclusively for commercial purposes, with some exceptions

As with any other rule, the 1031 real estate exchange also has exceptions. It is generally known that it does not apply for residential establishments – this means that you cannot trade the house you are living in with another one, belonging to an independent owner. However, you can benefit from this rule when it comes to holiday homes as long as you qualify for the swapping and you collaborate with a realtor who can explain you which the conditions are. There are some situations where personal real estate properties can subscribe to the process, such as interests as a tenant in common.

 

  1. Earn about “like-kind”

The term “like-kind” is extremely popular when it comes to 1031 real state exchanges, but it can also be quite confusing for those who have never had anything to do with the industry. The mysterious phrase does not mean what you probably think, which is involving belongings of the same type (ex: two office buildings). You can also swap, for example, a raw land with an apartment building, as long as they are clearly evaluated by an expert and both parties agree. In some cases, after thorough assessment, you can even exchange one business for another.

 

  1. You need a backup plan

Delayed exchange is very common as far as the 1031 is concerned, as it is difficult to find two similar properties with owners willing to swap. So, during the process, you are also going to have to designate a replacement property: the money received by the intermediary cannot be charged. Within 45 days from the exchange, you have to officially name a replacement property, so that the intermediary knows which the real estate you are planning to acquire is.