A Smarter Start to the Year: Aligning Your 1031 Exchange Strategy With Today's Market

The start of the year is a good time to look at your real estate holdings and decide whether this is the year to sell. If an exchange might be part of that, a little planning now makes the rest of the year easier. Here's a short checklist.

1. Wrap up any open exchange

If you sold last fall and haven't finished your exchange, your 45 and 180-day deadlines keep running into the new year. If your sale closed after about October 17, your 180th day falls after April 15. Let your CPA know you're in the middle of an exchange so they can file an extension. That keeps your full exchange period, and you have up to and including day 180 to complete your replacement purchase or purchases.

2. Get your CPA what they need

Every exchange is reported on IRS Form 8824 with the tax return for the year the relinquished property sold. If you exchanged California property for property in another state, you'll also file FTB Form 3840 each year you own the replacement property.

At the end of every exchange, we send a client settlement statement with a full reconciliation of funds, your critical dates and timelines, and your closing statements. Pass it along to your CPA and they'll have what they need to report the exchange.

3. Know your numbers

Before deciding whether to sell, ask your CPA what your gain would be, including depreciation recapture. That's the tax an exchange would defer. It also helps to know your current loan balance and your equity, because to defer all of the tax you'll need to buy at least as much as you sell and reinvest all of your net equity.

4. Decide what you want the next property to do

More cash flow, less management, a different market, consolidating into one property or spreading into several. The answer shapes what you look for. Those decisions are yours and your advisors'. Our job is to make sure the exchange is done correctly.

5. Start looking before you sell

You'll have 45 days after your sale closes to identify replacement property, and up to and including day 180 to close. The investors who have the easiest time are the ones who started their search before the sale closed, so the 45 days are spent narrowing down properties they've already considered.

6. Bring us in before closing

Your exchange has to be set up before your relinquished property closes. Once you're under contract, put us in touch with your closing agent, usually your escrow officer, title company or closing attorney. We can get most exchanges set up the same day.

Next step

If a sale is on your calendar this year, reach out and we'll talk through timing with you.

APX 1031 is a Qualified Intermediary. We don't provide tax or legal advice; talk with your CPA or attorney about your situation.