1031 Exchange

What is a 1031 Exchange??

Do you love strategy? Then real estate might be a good option for you. ;)

I enjoy the different routes you can take in real estate and the accompanying strategies.

One strategy is the 1031 Exchange, in which you exchange one property for another similar one. However, there are many rules to follow, and you must keep clean records and work closely with an experienced C.P.A. to ensure you do it right.

So, let’s get to it.

A 1031 exchange, also known as a like-kind exchange, is a tax-deferred strategy that allows an investor to sell a qualified investment property and reinvest the proceeds in another property without recognizing capital gains taxes at the time of the exchange.

Here is an overview of the 1031 exchange process:

Sell Property: The first step is to sell your investment property. The property must be held for investment or business use and not for personal use. Working with a qualified intermediary (QI), such as a bank, CPA, or real estate attorney, would be best; they hold the funds from a 1031 exchange in escrow until the exchange is complete. The QI receives the funds from the sale of a property and then transfers them to escrow to purchase a replacement property. You will also pay them for their time. So you can go ahead and plan for those fees.

Please identify Replacement Property: After 45 days of selling the property, you must identify potential replacement properties you intend to acquire as part of the exchange. The clock is ticking, and you have to make the exchange quickly.

Purchase Replacement Property: You have 180 days from the sale of your property to complete the purchase of the replacement property.

Complete Exchange: The proceeds from the sale of the relinquished property are held by a qualified intermediary (QI) to make sure that you have yet to receive actual or constructive receipt of the funds.

Report Exchange on Taxes: You need to report the 1031 exchange on your tax return, indicating that it was a like-kind exchange. You will also pay a fee to your C.P.A. to file/report this exchange. So plan for these fees as well.

A few takeaways:

It is best to run the numbers before selling your property to ensure that they make sense. The following investment property must equal or exceed the property you just sold.

You’ll be taking on more debt and potentially adding more risk to your portfolio, so be sure the next investment property will add something of value. It could have a higher cash flow, higher appreciation projected value, and maybe be a good candidate for cost segregation. Know your strategy before you buy.

By utilizing a 1031 exchange, investors can defer paying capital gains taxes, allowing them to reinvest the total proceeds into a new property and potentially increasing their overall investment value over time.

When considering a 1031 exchange, working with qualified professionals such as a real estate agent, tax advisor, and qualified intermediary is vital to ensure compliance with IRS regulations and maximize the exchange's benefits.

Again, this is my personal experience, and I can only speak to that. Please don’t hesitate to contact your C.P.A. for guidance.

I hope this was helpful!

Steph