If you invest or are interested in investing in real estate then you need to understand the 1031 Exchange, a useful real estate investment tool. Perhaps you’ve heard of the law, but then zoned out trying to understand all the ins and outs. Don’t let the complexities deter you from taking advantage of the lucrative tax deferment.
A 1031 Exchange is a transaction in which a taxpayer is allowed to exchange one investment property for another and defer the tax consequence of the sale. Basically, this is a deferment that allows you to keep 100% of your equity to invest again instead of paying 1/3 to the tax man. The exchange has to be “like-kind,” so you can’t sell your investment property and buy a Ferrari. It also only applies to income properties (sorry homeowners).
Simply put, this is a wealth building tool. It gives real estate investors increased cash flow for reinvestment. This increased purchasing power gives you the extra leverage to acquire, for example, a property or several properties with significantly higher investment benefits than if you sold the original property, paid all the taxes associated with the sale and purchased a new property.
Details of 1031 Exchange
Of course no tax law would be complete without plenty of complex rules and limitations. Here’s a breakdown of the big four:
- Deadlines – When it comes to 1031 Exchanges time is of the essence. You have 45 days from the close of the relinquished property to identify a potential like-kind replacement property. Then you have an additional 135 days to complete the exchange. Good luck getting an extension as they are pretty much non-existent.
- Intermediary – Sellers cannot touch the money in between the sale of their old property and the purchase of their new property. By law the taxpayer must use an independent third party commonly known as an exchange partner and/or intermediary to handle the change. The party who serves in this role cannot be someone with whom the taxpayer has had a family relationship or alternatively a business relationship during the preceding two years.
- Equal Value – The exchanger needs to use all of the equity and replace all of the debut to defer 100% of the capital gains taxes. You cannot pocket any money from this transaction.
- Deferment – It’s important to remember that a 1031 Exchange is a tax deferment, not exemption. The best way to think of it is as a capital gains rollover. If you ever decide to sell you will be on the hook for paying those taxes.
We’re Happy to Help with Your 1031 Exchange
Never try to execute a 1031 exchange on your own. While it is important to understand the law, it is best to complete the processes under the guidance of a seasoned professional such as a reputable commercial real estate investment firm. It’s too easy to get tripped up on many of the complex rules and regulations that the IRS sets forth.
Contact us for a Title Attorney in central Maryland who specializes in 1031 Exchange. We’re happy to help investors in the Central Maryland real estate market.
A big thanks to Ali Safavi for this guest post, Understanding the 1031 Exchange – A Useful Real Estate Investment Tool. Thanks for explaining the value of the 1031 exchange for real estate investing.
Ali Safavi received his BA in sociology from UCLA and his JD and MBA degrees from the University of Tennessee.
Ali’s impressive executive corporate experience stretches across several household name companies, including Hewlett-Packard, Sara Lee, Levi’s, Haagen-Dazs, P&G and Disney.
Ali’s passion is real estate investing. He owns multiple cash-flowing properties across the nation, allowing him to retire before the age of 40. Ali happily resides in Los Angeles, California, close to the most important thing in his life: his family.