In real estate business, performing a tax-deferred exchange can be a great way to maximize your wealth. There is a popular belief among most real estate investors that tax-deferred exchanges are only for huge corporations or for professional investors. However, this is not the complete truth. Performing tax-deferred exchanges have certain advantages, and everybody who is in real estate business should take advantage of these where they can. The problem is many people do not even know how performing tax-deferred exchange benefit them. 

Understanding Tax-Deferred Exchange

Tax-deferred exchanges avoid the tax bill on the sale a real estate investor performs. For example, if you own a property that has gone up in value, under tax-deferred exchange you can sell that property, and with the gain or profit from the sale you can buy a new property. However, you do not need to pay taxes on the sale immediately. However, if you do not find a suitable property to exchange for, you cannot avoid the tax bill. But otherwise, you would owe taxes only at the time when you finally sell the new piece of property. 

Why Taxes are not due at the Time of the Sale?

No doubt, when you sell a property, the amount of your profits are taxable, but performing tax-deferred exchange works as an exception. In tax-deferred exchange, you trade or exchange the sold property for similar property. This way, it is considered that the new property is nothing but a continuation of the original investment. That is the reason why taxes are not due at the time of the sale. 

Tax-Deferred Exchange: Is It Really That Complicated?

To complete a tax-deferred exchange in real estate business, IRS makes a person jump through so many legal hoops that most people do not like the idea of performing tax-deferred exchange just because they are very complicated. However, this is also not true. Once you understand the basic things, you will find that performing tax-deferred exchanges are actually not that complicated. You just need to know the right strategy to perform a tax-deferred exchange.

The Right Strategy: Do Not Do This Too Many Times

You first purchase a real estate below market value and rent it for a certain period, say one year. Then, you sell it and with the profit earned you buy more than one real estate property, say two. You would certainly want to do this numerous times. However, the problem is that if you do this too many times, IRS can disallow such exchanges because this way you get a wrong image that you are not a long time investor. Therefore, the right strategy is not to do this too many times. Moreover, since so much liability is at stake, you must take professional advice from someone who has all the details on your deal. It is better to take the services of a CPA or a qualified attorney when you decide to do a tax-deferred exchange. Some of them are extremely competent and can be an excellent resource for you.

Tax-Deferred Exchange: Things to Consider
Following are the things that you, as a real estate investor, must consider while performing a tax-deferred exchange.

Identification Phase of the Exchange

Do not forget to identify the property. You can do this by signing a written document and delivering it to the party assisting you with the exchange. You must do this on or before 45-days from the day you sold the original rental property. You can identify a maximum of three replacement properties without any regard to fair market value. However, if the total value of replacement properties is less than the double value of the original property, you can identify even more than three such properties. Make sure that you do not identify more properties than allowed because if you do so, you will be treated as if you have not identify any property, and consequently you would not be able to avoid taxes.

Time Limitations

There are certain time limitations for completing the exchange that you must take care of. For multiple property transfers, the time limit for the identification phase of the exchange is 45 days. If you are successfully through with the identification of property, you get a time limit of 180 days to complete the exchange. These time limitations are determined by the earliest date a property is transferred. However, if the time limit of 180 days is exceeded, or the property is received after the due date of your return for the year you made the transfer, the property will not be treated as similar property. 

Make Sure You Do Not Receive Anything That Could Be Count as Boot

Any money or any type of property that is of unlike kind, such as a car received as part of down payment, is considered as a boot. Such money or properties are taxable, no matter whether you have carried out the exchange correctly or not. Therefore, in order to avoid such boots, you must take the services of an exchange company or an attorney to examine your transactions closely.

If you consider the above few things while performing a tax-deferred exchange in real estate business, you can do wonders in maximizing your wealth

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