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What’s a 1031 Exchange?
Simply stated, a 1031 Exchange is exchanging one business or investment asset for another in Real Estate. Ultimately the exchange allows you as a tax payer to not pay capital gains. You can 1031 exchange properties with no limits.. As many times as you like. However, there are some rules and restrictions and keep in mind. This is tax code -“1031”. It is not real estate jargon!
You can’t 1031 your home. Sorry. No personal use.
This tax break is for investors and it’s a great tool when used correctly for the betterment of our fair cities, businesses, and properties.
First off to defer capital gains completely or in a very small sum, the exchange should be of equal or greater value. Don’t forget to consider your mortgage! The property may be of greater value but if your mortgage amount goes from 1.2k to 900k, that will be seen as a gain and that will be taxed. The property should be of “like-kind” and I’m sure you’re thinking a business for a business not a business for a farm. However, this term is used liberally. All though before you get too deep check with tax codes and make sure what you’re exchanging is “LIKE” enough for the IRS.
You can also delay the exchange and designate a property or multiple properties. However, in a delayed exchange the proceeds of the sale of your property must be held by an intermediary. You can’t receive the cash at all. You must designate the property or properties in writing to your intermediary with 45 days of the sale of your property. You now have exactly 180 days to close from the close date of your sale. Waiting the 45 days will cost you those days.. meaning, you now have 135 days to close.
As a realtor you can look savvy in your investors eyes when you suggest this as an option which will ultimately save them a great deal on their tax return.
Keep in mind, and I mentioned it before, this is tax code! It’s deeper, longer winded and far more complicated than a quick article explaining the features. You want an expert to guide you! Your Realtor or if you are a Real Estate Agent can give a great suggestion! But.. It’s the experts that the agent works with that help guide him or her through this portion of the sale.
Who doesn’t want and expert as their advocate in a 1031 exchange? Answer is “No one” Real Estate can be tough and certainly not as cut and dry as it may seem.