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Buying A Home While Selling A Home: The Advantages Of A 1031 Exchange

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Whether you're trying to up-size, down-size, or just move, you may be in the position of trying to buy a home and sell a home at the same time. This is a situation so common that there's a special process for doing it: a 1031 exchange. Here's what you need to know about transitioning one property type to another.

What is a 1031 Exchange?

In a 1031 exchange, you sell a property while purchasing a property of the same type. Rather than having to pay taxes on the income from the first property, the cash you get from the first property goes directly into the purchase of the next property. In other words, you don't need to pay capital gains on anything that you made during your first property's sale: your equity just moves from one property to another.

In order to complete a 1031 exchange, though, you need to let your real estate agent know early on. The escrow company will need to hold on to your funds; if you are ever in possession of the funds from the first sale, the 1031 exchange cannot be completed.

1031 exchanges also have to be like-kind properties. That doesn't mean you can't sell a town home while looking for single family homes for sale. Rather, it means that you can't sell a business to purchase a home or sell a single family home to purchase an agricultural lot. The type of property that you are purchasing has to be generally the same as the type of property that you are selling.

Selling a Home While Buying a Home

Exchanging properties can be complex because the timing has to be just right. Consider selling your home only to find that your deal to purchase a home has fallen through; now you need to find a place to stay if you're going to honor the initial sale. Due to this, real estate agents have special documents and contracts that are used when you're trying to do this. A contract may indicate that the sale will only go through if you are able to purchase a new home in time.

Your real estate agent is the one who will help protect you during this complicated transaction. It's important for you to find the right real estate agent who will be able to walk you through the process of purchasing a new home and selling your new home in a well-coordinated fashion.