How do I make my real estate a 1031 investment?

Section 1031 doesn't just 'happen' to lucky real estate investors. There are things you can proactively do to make sure your real estate investment is '1031-exchangeable' when the time comes to sell.

Here are a few tips:

1. Create a paper trail for the IRS that shows your intent to produce income. For example, rent it out right now. Or at least have it advertised for rent.
2. Report the mortgage loan interest associated with this property as investment or rental property interest expense instead of home or second property interest.
3. Clearly state your investment intent with this property in all documents and correspondence with your CPA, Realtor, Attorney, etc. Heck, you can just send them a little 'thank-you' note telling them how you appreciate their service, and mention how you look forward to the property's appreciation in value. Then call and ask them to put the note in your file.
4. Show all your expenses related to renting the property on your tax returns. For example, deduct maintenance, depreciation, etc. on a rental schedule on your tax return
5. Plan on owning this property for at least one year and one day. 1031 exchanges are not meant for fix and flips.
6. Keep records and receipts. If your property is a “vacation home,” be sure that if you stay there for more than 14 days a year, keep records and receipts as evidence that you were there to maintain the property.

There's a great example of what NOT to do in a tax-deferred investment in Gary Gorman’s article: How to screw up a 1031 exchange.

And finally, tip #7: Print this handy list and give it to your clients. You can begin NOW to set up your real estate investments for tax-deferred 1031 treatment in the future.

--The Experts