Copyright 2006 YourLenderForLife.com
The grass is always greener, isn’t it? Maybe you see something better on the other side, or maybe you have problems with one of your current properties. But before diving into a 1031 exchange, consider why you want to exchange, and whether or not it will solve your problems.
• Property Management Problems - If you’ve lost the taste for property management, would another location really change anything? Try hiring a manager. After all, tenant / landlord problems exist everywhere…even with higher priced properties.
• Tax Solutions - It’s true that you can defer your payment of Capital Gain Taxes when you exchange some properties. But if the new property costs as much as the one you sold, then you’ll probably see a property tax hike.
• Income Solutions - A powerful ‘grass is greener’ temptation is when you start thinking one property will produce more cash than another. It’s true that some will, but ask yourself why you’re having problems now. Is it the property or the management? Lower tax rates and lower maintenance costs, are sometimes good reasons for a 1031 exchange. But if maintenance costs are high because of negligence, you’ll find yourself with the same problem (lacking a paddle) in a new creek.
• Low Adjusted Basis - If you have a low adjusted basis, without a high debt, a 1031 exchange will just carry your benefits over to the new property. It might just be a waste of your time.
• Credit Problems - If the 1013 exchange involves a mortgage loan, bad credit can bring high interest rates or a set of less desireable terms. Not to mention two sets of closing fees. In the end, your cost goes up.
After all that, remember the investment you make in any transaction. Your time. Are you wasting it and what is the risk? 1031 exchanges require a sale and a purchase (with all the money changing finalized) in a specified time period. What happens if there’s a hold up on a loan? How easy will it be to sell your property? How easy will it be to find a replacement? If you already have your eye on something, are you sure it’ll still be available when it comes time to buy?
The benefits of a 1031 exchange cover a well defined area and the lawn clippings look fresh and green. But if you fall outside of that area, a jump over the fence might only lead to a field of dead weeds.
Keith Gill is an experienced Real Estate investor and Mortgage Loan executive for a Major Mortgage bank that does loans in all 50 states. For more useful info got to: www.tucsonmortgagehome.com
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