To many people, the 1031 DST exchange is still a mystery, but this only happens because they have not spent too much time getting informed on this subject and understanding how it works and what are its benefits. The government implemented this property exchange strategy in order to make it easier for business persons to sell and buy properties and to help them defer certain taxes. To succeed in a 1031 exchange, it is recommended you follow these simple, yet highly important rules.
Rule no. 1 – understand the terms and conditions
The first and most essential rule before you engage in a 1031 exchange is to ensure you have all terms and conditions cleared out. Do some detailed research on this strategy and learn everything it is to know about it in order to perfectly understand under what conditions you can opt for this strategy and what aspects you should pay attention to the most.
Rule no. 2 – check the papers before signing the agreement
Another highly important rule to consider when you decide to go for the 1031 exchange strategy is to carefully check all your documents and the papers of the person you will exchange properties with to ensure there are no mistakes. Whether they are math or grammar mistakes, it is best to have them corrected before you sign any agreement contract.
Rule no 3. – consider the 180-day period
One of the most misunderstood rules related to the 1031 exchange strategy is related to the period during which people have to close the deal. First, you should know that there is a 45-day period during which you are supposed to search for the replacement property that best suits your requirements and needs. Whether you opt for the services of a DST company to help you find the perfect one for you or you search for it on your own, pay attention to the deadline. Once you have found it, you have 135 more days to close the deal. Contrary to what many people believe, this 180-day period does not exclude weekend days or holidays. Pay attention to the deadline and try to work within these days to benefit from the desired results.
Rule no. 4 – choose the right replacement property
Some people who are not familiar with the 1031 exchange strategy are of the opinion that they can replace their properties with any other building or land available on the market, but they couldn’t be any further from the truth. Know that the replacement property you exchange yours with should have either equal or greater value in order to succeed. Otherwise, you will not be able to defer a high percentage of the tax.
Rule no. 5 – it must be a property, not something else
Last but not least, it is important to keep in mind that you can only resort to the 1031 exchange strategy when it comes to properties that have the same character. This means that you are not allowed to exchange some farming or building equipment for instance for a building.