There are several ways to benefit from owning property or investing in real estate. Benefits can be found not only from finding the right property, loans, and people to work with when buying, but also when you’re ready to sell.
What is a 1031 Exchange?
A “1031 Exchange” is the nickname used when discussing Section 1031 of the U.S. Internal Revenue Service’s tax code. It allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.
Here we will only cover 1031’s in relation to real estate.
Why is a 1031 important?
Investors can take advantage of the 1031 tax-deferred exchange to acquire a more valuable investment property. By utilizing the money, they would have paid to the IRS in taxes, they can increase their own down payment and improve their overall buying power to acquire a more expensive replacement property. Thus, leveraging their cash and continuing to build wealth through real estate investment.
With the flexibility of an exchange, an investor may exchange one property for several others, consolidate multiple properties into one, and acquire property anywhere within the United States. For example, an investor can exchange two duplexes for a real strip center or take advantage of a new growth area by exchanging one property in California for three properties in Georgia.
Qualifications and Restrictions
There are several things to keep in mind if you are considering a 1031 exchange: 1) The real property being exchanged must be investment property, not personal (not your personal home) or resale. This usually implies a minimum of two years of ownership. 2) The new investment must be what is known as “like-kind”. Like-kind property is defined according to its nature or characteristics, not its quality or grade. This means that there is a broad range of exchangeable real properties. Vacant land can be exchanged for a commercial building, for example, or industrial property can be exchanged for residential. However, you can’t exchange real estate for artwork, for example, since that does not meet the definition of like-kind. 3) To receive the full benefit of a 1031 exchange, your replacement property should be of equal or greater value. 4) You must identify a replacement property for the assets sold within 45 days and then conclude the exchange within 180 days.
How do you complete a 1031 exchange – The 10 Step Process
- Decide to sell and do a 1031 exchange – discuss with your accountant to make sure a 1031 is the best move for you.
- List your property for sale – the buyer will need to agree to being involved in a 1031 exchange process.
- Begin looking for replacement properties – the moment the relinquished property is sold, the 45-day countdown begins.
- Find a qualified intermediary – someone who will help to facilitate the exchange.
(Under Treasury Regulations section 1.1031(k)-1(g)(4), a QI is any person who is not the exchangor or a disqualified person.)
- Negotiate and accept an offer
- Close on the sale of your relinquished property
- Identify up to three properties to pursue within 45 days
- Sign a contract on the first-choice property
- Let your qualified intermediary work with the title company or real estate lawyer.
- Close on the replacement property
If you are interested in learning how we can help you complete a 1031 exchange, please contact us at email@example.com 404-905-1415