Do you plan to complete a 1031 (like-kind) exchange for a rental property? This legal method for delaying taxes until a time that works better for your finances is an important tool for many rental property owners. And you have even more choice during 2021 due to new IRS rules that allow you to delay your exchange even longer than normal.
But should you wait to complete your transaction? Maybe not, and here are a few reasons.
1. Other Investors Will Also Wait
When the IRS puts a deadline in place, many Americans will naturally put off completion of that task until the deadline looms (or arrives). And when that deadline is extended, they likely will put off the work even longer.
So if you're thinking about delaying your transaction, you can be sure others are doing the same. Then, when the new deadline of July 15 comes around, everyone will be pursuing the same properties or the same trust solutions. You would do well to get ahead of the pack so you have more and better options.
2. Exchanges Don't Always Go Well
Even in normal times, real estate investors are advised not to wait until the deadline for their 45 day period to identify property or 180 days to complete the exchange. Why?
Simply put, real estate purchases don't always go to plan. You may fail to close for a variety of reasons, including issues with the seller that are completely out of your control. If this happens, you'll have to scramble to avoid a tax bite. It's better to get through this process early and have the extra time as a buffer in case of emergency.
3. There May Be No Incentive
Modern 1031 exchange options provide plenty of alternatives that may make the extended time frame largely irrelevant.
For instance, if you are having trouble in the tight rental real estate market, you could take advantage of a trust to invest in pooled property rather than individual units. And if you have other pandemic-era worries, these trusts are a good place to temporarily 'park' your investment until things calm down. So, how much will it actually benefit you to simply delay the transaction?
Where to Start
Learn more about new tax extensions for rental property 1031 tax exchanges and whether or not you should use them by meeting with an experienced tax service in your state today. You may find that you can get just as much benefit with less hassle by finding other solutions. And that's one less thing for owners to worry about in 2021.