Last updated on April 30, 2024
Would you like to defer paying taxes on investment properties while still adding to your portfolio? Let me share a little about the 1031 available Exchange program.
What is a 1031 exchange?
It is named after Section 1031 of the U.S. Internal Revenue Code and is a powerful tax-deferment strategy used in real estate investment. It allows an investor to sell a property and reinvest the proceeds into a new property of like-kind while deferring capital gains taxes that would typically be due upon the sale.
What Properties Qualify?
The properties involved must be held for productive use in a trade or business or for investment purposes. This typically includes a wide range of real estate types, such as residential rental properties, commercial buildings, vacant land, and more. Personal residences and properties primarily held for sale do not qualify.
Timing
Once you sell your property, you have 45 days to identify potential replacement properties and 180 days to complete the exchange by purchasing one or more of those identified properties.
Qualified Intermediary (QI)
To ensure the transaction qualifies for the 1031 exchange, you need to work with a qualified intermediary. The QI holds the proceeds from the sale of the relinquished property and then uses those funds to purchase the replacement property on your behalf. This intermediary ensures that you, as the investor, never take actual or constructive receipt of the proceeds, which is crucial for the exchange to be considered valid.
Like-Kind Requirement
The replacement property must be of like-kind to the relinquished property. In real estate exchanges, the definition of like-kind is quite broad, allowing for significant flexibility. For instance, you could exchange a commercial property for vacant land or a residential rental property for an office building.
Tax Deferral
By completing a 1031 exchange, you defer paying capital gains taxes, including federal and state taxes, on the sale of the relinquished property. Instead of paying taxes immediately upon the sale, you can reinvest the full proceeds into a new property, allowing your investment to grow without being diminished by taxes.
Potential for Multiple Exchanges
Investors can use 1031 exchanges repeatedly to continuously defer taxes as long as they follow the rules outlined by the IRS.
Overall
The 1031 exchange program provides a valuable tool for real estate investors to grow their portfolios while deferring tax liabilities. However, it’s crucial to work with experienced professionals, in all aspects of the transactions. This includes a Full Time, Professional REALTOR®, tax advisors, and qualified intermediaries. This is the only way to ensure compliance with IRS regulations and maximize the benefits of the exchange.
The information included in this article comes from a 1031 Exchange Class provided by Land University, taken in March of 2020, and other related sources.
Jerry Welch, Realtor
Jerry Welch is a full-time, professional REALTOR® with over 17 years in real estate and specializes in helping seniors’ transition. He holds an SRES (Senior Real Estate Specialist) designation, which reflects his extensive education on topics such as tax laws, probate, estate planning, and equity conversion strategies. He offers relevant information on current market trends as well as being a valuable resource regarding real estate transactions. He was one of the founding members and is a past chair of the Rockwall Chamber SSA (Senior Services Alliance) Program. (972) 800 3915
