The 1031 Exchange in 2023 – What Every Investor Should Know

David Moore: Hi, David Moore, Equity Advantage, 1031 in ’23. So first thing I’m going to tell you is figure out what your tax hit’s going to be before you ever choose to sell something, understand what the tax liability is going to be, and that way you can make a rational decision on whether the exchange is the right thing, it’s not always the right thing for people.

And in today’s world, we’ve got some opportunity costs that are there, because you’ve got this money that has to be spent within the 45 ID period, the 18-day total time. So understand what your tax hit’s going to be, see if you can mitigate the tax hit somehow somewhere else. But if you need to do the exchange, understand that you have to, number one, understand what that liability is going to be, get pre-qualified for what you want to buy, make sure you’re working proactively to find things.

People ask all the time, “When do I want them to think about exchange?” I’m going to tell when they buy the thing, but when they first contemplate a sale, really get yourself in a situation, understand the tax hit, get yourself pre-qualified, if it’s some type of asset, you can.

Obviously, if we’re dealing with some big industrial, big properties, you’re going to have to have numbers from that seller. But if we’re talking rental houses, you know what you’re going to qualify for, if you’ve gotten out there, got pre-qualified and really go find it. And what I mean by that is, when you have a sale pending at that point, reach out, get the exchange set up.

If you’re working with us, we don’t have a cancellation fee, so we’re going to put the deal together. But you’ve got all the time in the world before the closing to decide whether you want to do the exchange. If you get to that settlement day and you still haven’t decided whether you want to complete it, well, the exchange closes as an exchange, you’ve got another 45 days to rationally figure out where you’re going and you get to the end of that 45th day at that point, either be committed to completing the exchange or you should terminate at that point.

And the reason I say that is if the money is here and you’ve identified something on day 45 per section 1031 G6, we cannot release the funds until you’ve purchased everything, you have the right to buy, so if you’ve ID’d something, “Just in case… ” I can’t give you the money until day 181.

So imagine this… You set up the exchange, you get in the transaction, you get to the 45th day, you just said, “Hey, I’m going to put this property just in case… Two weeks later, you find what you really want. Now you want me to give you the money, I can’t do it, so don’t put something down “just in case”.

And that’s probably my biggest piece of device for 1031’s in 2023 is, “Don’t ID something unless you’re totally sure you’re going to complete it and take your time on stuff, get things set up early before you get a close. You’ve got all that time to find what you want, then you got the 45 from settlement to figure it out. But on that 45th day, it’s a do or die, either you’re committed to completing the transaction on day 45 or you should terminate it and we can get you the money back.

Sort of caveat is understanding that opportunity zones are sort of being thrown around as a fall back for a failed exchange. Talk to your tax people. Understand what the timelines and getting money into an OZ really are. There’s some differing opinions on that, but typically, if you look at the rules, it’s 180 days, the same 180 that 1031 has. We’ve got ways around that, and like I said, there’s some talk of some different timelines that may exist in that space, too. Talk to your tax people, understand what’s there. David Moore, Equity Advantage, 1031exchange.com. Thank you.