Explaining the use, benefit, and limitations of a 1031 exchange.
I talked with a client the other day who owned several rental properties and vacant lots. He bought all of these on speculation, hoping the values would go up, and with values at all-time highs, he’s thinking about selling. He didn’t feel like being a landlord anymore. I asked him if he was interested in a 1031 like-kind exchange, and he was bewildered; he had no idea what that meant. Some of you might not know either, so let’s go over 1031 exchanges.
In a nutshell, it’s a way to defer the taxes on the gains you would realize by selling an investment property. You should understand that this is not a tax-free process; you won’t have to pay the taxes now, but you will have to at some point down the road. Also, you can only do this exchange with investment properties. Your primary residence does not qualify.
Like-kind exchange doesn’t necessarily mean that you have to sell a condo and buy a condo. You certainly can, but all it means is that you need to sell an investment property and purchase another investment property. We’ve seen people sell a large tract of land that isn’t earning any income and invest the gains in something that will.
“You won’t have to pay taxes now, but you will at some point down the road.”
There are a few different types of 1031 exchanges. The simultaneous exchange is where you sell a property and immediately buy the replacement. You can also do a deferred exchange, where you sell a property and buy the new property later. Finally, there’s also a reverse exchange, where you buy a property first, sell another investment property, and put the gains into your new property.
Whatever type you choose, you have to do it all within a certain time frame. You have 45 days to identify the participating properties and 180 to complete that transaction. I recommend you get an agent who is familiar with 1031 exchanges and talk to your tax professional to make sure you meet all the requirements.
If you have any questions about 1031 exchanges or real estate in general, feel free to call or email me. I would love to hear from you.
