Real estate investors and developers run into difficult situations when it comes to certain properties–namely, that they just aren’t worth their investment. This is a severe limitation to investing because if it isn’t worth it to one investor, it likely isn’t worth it to another.
However, having a specific kind of property can be a great investment to the right kind of developer. Or, even if you want to offload some property, you can add some additional real estate to sweeten the deal.
If you are in a position where you want to consolidate some property into a better real estate investment, you most likely want to make a real estate swap. Here, we’ll run through the basic steps to get that process started.
Find Out How Much Your Property is Worth
First things first: what is your property worth? When assessing your property (and we mean all the property you want to consolidate) you need to understand three pieces of each piece of land:
- How much is it worth on the market?
- How much equity do you have in the property?
- How much debt do you have tied to the property?
Once you know these three pieces of information, you can more accurately consolidate property in a swap.
Locate Someone Willing to Engage with an Exchange
This part can be a bit trickier. Like we said, if you don’t want to maintain a property, it is usually for a reason. However, one man’s trash is another’s treasure, which means that you might find someone who is willing to take a single property or multiple properties in trade, based on the value of that property.
However, most real estate sales transactions usually trigger steep tax requirements that can limit exchange. This is when you need to investigate a 1031 Exchange.
Learn About a 1031 Exchange
A 1031 exchange is named so because of its reference to section 1031 of the IRS code. A 1031 Exchange stipulates that an investor can exchange a “like-kind” property for another without incurring taxes that would result from the profit of a sale.
What this allows you to do is exchange property (or properties) to someone else without having first sell and then buy that property.
The “like-kind” limitation is important and will limit how you can trade or consolidate property.
Are You Eligible for a 1031 Exchange?
If you want to make a 1031 Exchange to consolidate some property, then the value of the properties in question must be near or at the same value of the property you want to trade it for. Typically, this means that your existing properties at least have some property value on hand. It also means that the property must be of the same kind, like real estate for real estate.
You also can’t perform a 1031 Exchange on personal property, like your residence. It must be a business property or investment property.
With this technique, you can avoid or put off capital gains taxes on your current property and consolidate multiple properties into a like-kind property that you find easier to manage.