The Basics of 1031 Exchanges and Why It May Be a Good Option For You!
With the real estate market values remaining at an all-time high and limited inventory many owners are questioning whether it is a good time to sell? In particular owner who hold investment property have experienced increased values and are wondering if now is the time to make a change. One of the tools savvy investors have been utilizing in investment property sales is the 1031 Tax-Deferred Exchange. A 1031 exchange can give investors an increase in purchasing power as well as the benefits of consolidation/diversification and the potential for increased cash flow.
If you are not familiar with the 1031 Tax-Deferred exchange it is a Section of the Internal Revenue Code which allows a seller to defer paying capital gains taxes on an investment property if the funds are reinvested in “like-kind” assets. For example, you can sell your investment property and acquire another property of equal or greater value while deferring capital gains taxes. This allows you to re-invest sale proceeds that you would have otherwise paid as taxes.
Reasons to use a 1031 Tax-Deferred Exchange
There are many reasons investors choose to utilize a 1031 exchange.
Increased Cash Flow/Income: Cash flow and income can be increased when the investor exchanges one property for another of greater value. This can be achieved several ways, one example could be selling a vacant piece of land which does not provide you with a monthly cash flow and purchasing an income-producing property (single family home, condo or apartment complex).
Increased Purchase Power/Leverage: Because the investor is able to re-invest the funds, they would have otherwise had to pay in capital gains taxes, many investors are able to purchase more expensive properties which build wealth via real estate investment and may also in turn provide them with increased monthly cash flow via higher rent payments.
Consolidation or Diversification: This can be one of the most beneficial aspects of a 1031 exchange, especially if you have significant capital gains. With the increased purchasing power, an investor could sell one single property and exchange it for the purchase of multiple properties, an apartment complex or even a retail complex. The flexibility of the exchange allows investors to purchase “like-kind” assets anywhere within the United States within the time frames specified.
Basic Requirements for a 1031 Tax-Deferred Exchange
Taxpayer Requirements: The taxpayer must acquire the title to any new asset in the same manner title was held on the exchanged asset. For example, if you held title as an Individual on the property being sold, the property being purchase must have title in the same name. There are some exceptions to this rule which an exchange accommodator or tax professional could identify.
Deadlines and Identification: There are two deadlines for the exchange, which begin on the date of transfer of the first property.
- Replacement property must be identified within 45 days.
- The exchange must be completed by which ever below is earlier:
- 180 days from the closing date of the relinquished property.
- The due date of the taxpayer’s federal income tax return (including extensions).
Identification of the replacement properties must be described in writing by the taxpayer. Up to 3 replacement properties can be identified without regard to their fair market value. Additionally, any number of properties can be identified, as long as their combine fair market value does not exceed 200% of the fair market value of all relinquished properties.
*Note these deadlines may be temporarily changed due to the COVID-19 State of emergency. *
There are many reasons to choose to utilize a 1031 exchange, and the fact remains that it is a powerful tool for investors. As a property management company we see many of our clients engage in 1031 exchanges. We are in a unique position to be able to relinquish and acquire assets within our management portfolio, often times giving our owners an opportunity to buy or sell to our other owners before properties hit the open market. Many of our owners are looking to sell or exchange their properties, often which are already tenant occupied, providing opportunity for clients interested in acquiring investment property. If you are thinking of selling, exchanging or purchasing investment property contact our office for a personalized market analysis.
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The information above is a general overview of the 1031 tax deferred exchange option and is not intended to be a complete analysis of the Internal Revenue Code. Golden Key Properties, Inc. is a real estate company and represents buyers and sellers in the sale or purchase of real estate property. Golden Key Properties, Inc. is not an exchange accommodator, tax advisor or legal representative. Please consult you tax professional or legal representative to gain more information on if a 1031 Tax-Deferred Exchange would be a good option for you. Please contact your property account manager at Golden Key if you would like to discuss your options and/or receive recommendations to one of our preferred exchange accommodators.
*Information sourced from First American Exchange Company, a qualified intermediary for 1031 exchanges.
**This is not intended to solicit another broker’s listing.
