If you’re thinking about selling your investment property, you should know about the 1031 tax-deferred exchange. This strategy allows you to sell your investment property and buy another similar property while deferring capital gains tax.
It sounds like a win-win, but if you’re still unsure what a 1031 exchange is and what it offers you, you’ve come to the right place. As experts in real estate at IPRG, we’ll cover everything you should know in this article. From more of what the exchange is to the rules, timeline, and benefits you’ll get from choosing this option.
What is a 1031 Exchange?
The 1031 exchange is section 1031 of the U.S. Internal revenue Code. This means that you can avoid paying capital gain taxes when you sell your investment property and reinvest the funds into a similar property. The reinvestment needs to be done within a specific time limit through this code section.
The exchange part comes into play as any proceeds earned in selling your property remain taxable and must be transferred to a qualified intermediary. The intermediary can be an agent or company who agrees to hold the transaction’s funds until transferring the funds to the seller of the new property. Hence it’s called a 1031 exchange. As a result, you exchange or swap your property without paying the capital gains taxes, allowing your investment to grow.
Rules and Timeline of a 1031 Exchange
With any type of code or guidelines that are established, there are rules to follow, and the 1031 Exchange is no exception. For example, to defer capital gains taxes, the property you are exchanging for must be of like kind (investment for investment) in the eyes of the IRS. However, this doesn’t mean it needs to be the same property type. As long as it’s an investment property, it usually applies. So, for example, you could sell a multifamily building for a retail strip mall. Or, if you want to move your investments from one state to another without the capital gains, the 1031 Exchange makes that possible.
While there is no limit to how many exchanges you can do, there is a time limit. To make a successful exchange, you must identify up to 3 replacement properties within 45 days.. You then must close on the replacement within an additional 135 days from the sale of the property. The clock starts ticking down when the sale of your property closes.
You may have cash left over after the intermediary acquires the replacement property. If so, the intermediary will pay it to you at the end of the 180 days. That cash–known as “boot”–will be taxed as partial sales proceeds from the sale of your property, generally as a capital gain.
Benefits of a 1031 Exchange
The main benefit to a 1031 exchange is it allows an investor to defer paying capital gains taxes on an investment property when it is sold There are, however, a couple of other benefits to choosing an exchange.
Deferring your taxes allows an investor the opportunity to take tax-free equity from the sale of your property and leverage the proceeds on the next investment.Especially if you sell for a premium and purchase a more valuable asset with either value-add component or property with more cash flow. In addition, they are a tremendous wealth-building tool to pass on to generations of investors.
A 1031 Exchange can also relieve you of any management intensive properties you may have invested in. As an example, suppose you own a multifamily building that requires the you as the landlord to be involved in the day to day management. You could exchange could sell and exchange into a NNN or retail properties with less tenants and replace the burdening property with a less maintenance one.
Most people make money with real estate investments because they buy at a good basis, add value, build equity, and eventually sell high.. However,when making the decision to sell its not only important to work with an agent to get you the highest price, but one with the experience to help you achieve your goals such as completing a successful 1031 exchange. IPRG helps its clients seamlessly navigate this process.
IPRG 1031 Exchange Expertise
The tax deferment you benefit from in a 1031 Exchange is an excellent opportunity for investors. The exchange process could be complicated if you try to complete it on your own, and this is where our team of experts comes in at IPRG. We work with you to ensure you receive the best ROI on your investment and can navigate you through the process of a 1031 Exchange so you can grow your net worth. Contact us at PIRG to sell your property through a 1031 Exchange today.