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1031 Exchange Fear Factor
Many investors don't take advantage of 1031 exchanges because of fear of the 45 day identification period. This fear is supported by numerous horror stories of failed exchanges and the resulting payment of devastating taxes caused by such failures.
With proper planning and the right resources investors can navigate the waters of a 1031 exchange unscathed and frequently double or triple their spendable income, diversifying their portfolio and reducing risk. What is required to do this is a good grasp of the exchange process, a clear set of investment objectives and a plentiful and consistent source of quality replacement properties.
This process does not have to be difficult or stressful. The goal is to make the 45th day of your identification period the most unruffled day of your life. Believe it or not it can be done by simply making a plan and following through.
The planning process begins with an evaluation of your current situation (how much do you have to work with); the income you would like to receive monthly and what your risk tolerance is (are you conservative, middle of the road or an aggressive investor). Once you have this information you can review the various scenarios making sure that the income you would like to achieve can be produced at a level of risk that is tolerable to you.
To evaluate risk the keys are real estate basics; make sure you understand the demographics, the terms of the leases and the quality of the tenants. By understanding the risk you will be able to judge the likelihood of receiving the income desired and have a ready tool to compare various investment opportunities.
One of the more powerful strategies for managing risk is to diversify your portfolio. By spreading the risk out by geographical location, asset class (office, retail, multi family etc.) and risk category the investor can construct a source of income that is suitable to their individual needs and tolerances.
Please consult with your legal and tax professionals prior to making any decision regarding any real estate investment.
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