The Tax-Saving Method Almost No One Uses (Reverse 1031 Exchange)
Imagine the reverse 1031 exchange like trading cards. You have some cool trading cards and you want to swap one card for another, but you don't want to pay any money or taxes for it. Well, that's kind of like what a reverse 1031 exchange is in real estate.
In regular trading card swaps, you'd usually just trade one card for another directly. But in a reverse 1031 exchange, it's like you're doing things in a tricky order. First, you find someone who wants your card (property), and they give you their card (property). But you can't keep their card right away. Instead, you have to find a temporary place to keep it, kind of like putting it in a special box for a while.
Then, you have to go find someone else who wants to give you the card you really want (your dream property). Once you get that card, you can finally take out the card you were holding in the special box and give it to the person who originally traded with you. It's like doing two trades at once, but with a little bit of a delay.
The tricky part is that you have to follow some special rules and work with experts (like real estate professionals) to make sure everything goes smoothly and the taxman doesn't get upset. But if you do it right, you can switch properties without paying extra taxes and get the one you really want in the end.
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Key Takeaways:
The Reverse 1031 Exchange allows you to buy a replacement property before selling your existing property to take advantage of market conditions
You need to work with a Qualified Intermediary and an Exchange Accommodation Titleholder
There are strict deadlines including a 45-day identification period and 180-day exchange period
Costs can range from 1-3% of the total sales price and include fees for professionals involved
You need to accurately report the transaction on Form 8824 and provide supporting documentation for your tax return
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville.
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