What is a 1031 exchange? In IRS parlance it’s also known as a like exchange. You roll the profits from one deal into another and use them to buy your next investment property. With 1031 exchanges you can defer paying capital gains taxes- indefinitely.
But of course there are some rules you need to follow with 1031 exchanges:
1. Your next investment property must be of equal or greater value: So you can’t earn 1 million in profits on one deal, spend 50 K on the next and then jet off to the Bahamas tax-free.
2. You need to hold onto the property for over a year:- Your property needs to be held for an “investment purpose.” No one knows how to define what it means to hold a property for an “investment purpose,” but the basic requirement is you need to hold onto the property for 13 months or longer.
3. You need to close on your next investment property within 135 days: So if you need financing to settle a 1031 exchange, you’ll need to get your loan approved within that deadline.
Considering that deadline, going to a conventional bank to finance a 1031 exchange could put you at risk of incurring a massive tax bill.
135 days might seem like a long enough time to close a deal, but in the world of bank bureaucracy, 135 days is nothing. Even if you have perfect credit, it’s going to take at least 30 days for the bank to approve your loan and that’s in the best case scenario.
On average it takes 90 days for a commercial loan to get final approval from a conventional bank. That’s 90 days after you’ve spent a few weeks finding your next investment property and gathering up the reams of paperwork that the bank requires. Weeks into this process, the bank could reject your application for some inexplicable reason. Which means you’ll have to start the application process over at another bank.
You don’t have that much time to waste with 1031 exchanges. Say you earned a million dollars on your last deal, then going to a conventional bank could cost you 200 K or more in taxes. However, if you go the hard money route instead, you take all such risk out of the equation.
Hard money deals usually only require an appraisal, meaning they can close within a week. After you get hard money, you secure your next investment property, apply for conventional bank financing, and refinance once the bank approves your loan.
With hard money, if something goes wrong with your application at the bank, you’ll still have your investment property under contract. Meaning you won’t have to risk incurring a substantial tax penalty to complete 1031 exchange.
Don’t risk paying hundreds of thousands of dollars in taxes due to the nightmare of bank bureaucracy. If you need financing to close a 1031 exchange go the hard money instead.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.