1031 Exchanges and How a Title Company Can Help

One way you can acquire or upgrade to a better investment property without immediate tax implications is with a 1031 exchange. Sure Title Company can help with handling this type of real estate transaction. 1031 exchanges can be complicated, and IRS has several rules to follow if you want a tax deferral qualification.

A title company can help make sure you obtain your new property without title hassles. Discover more information about 1031 exchanges, potential title issues, and the ways a title company may be able to help.

1031 Property Exchange Overview

A 1031 property exchange is an exchange of like-kind investment properties between two parties. This type of exchange allows each owner to defer capital gains and other property taxes to a future date. A qualified property is strictly for investment, not for your personal use. The new property must also be for investment use.

Like-kind property exchanges mean that you must exchange one investment property for something similar. For example, you can exchange a rural ranch for an urban apartment complex. Or, you can exchange a rental house for raw land. You cannot exchange land for non-like properties like a vehicle or private home.

1031 property exchanges can happen in four different ways, as listed below. All have a unique time frame for completion.

Simultaneous

With this exchange type, you and the other property owner exchange properties at the same time. Many people complete this process within a day, sometimes with help from a third party.

Delayed

Delayed exchanges are more traditional. You sell your property first and use the money from that transaction to buy the new property. You usually have a short time to make the exchange if you want to get tax benefits.

Reverse

A reverse exchange is the opposite of delayed in that you purchase or obtain the other property first before you exchange your own. Often, this requires you already have cash available for the new property. Like delayed exchanges, you have a limited time to complete it to receive tax breaks.

Construction

With this exchange type, you make tax-deferred improvements to the new property before you exchange the old property. Again, you or the other property owner must complete the improvements within a short time frame.

1031 Exchange Potential Title Problems

A clean title is even more important for a 1031 exchange because the IRS has specific rules before you can get a tax deferral. For example, the property exchange must involve the same taxpayer. If the other assumed owner has ownership complications, you could be on the hook for added taxes and expenses. A thorough title search can inform you of who owns the property and whether the property qualifies for an exchange.

1031 exchanges may also have other issues that could affect your bottom line. When you close on a property, you will be responsible for these issues. For example, you may have additional difficulties like:

• Property ownership disputes between joint taxpayers or corporate partners
• Liens on your property from lawsuits
• Unpaid property taxes
• Additional government fees
• Claims by heirs and other parties

When you use a title company, you get services that make the property transaction easier. Title companies will search your title to look for some of the issues listed above. In addition, they will handle much of the closing paperwork and provide title insurance. A title company can also act as a qualified intermediary to handle the entire 1031 process.