What is 1031 Exchange?

1031 real estate investing

As listed in Section 1031 of the IRS’s tax code, a 1031 exchange is a very popular tax strategy that real estate investors often take advantage of. If you currently own investment property and are looking to sell it and buy another - or you are just starting out with investing - having an understanding of a 1031 exchange can prove to be very beneficial for your portfolio and your wallet

Understanding a 1031 Exchange

Investors take advantage of this tax break when they have a piece of property they use whether as an investment property or for business - and then decide to sell and buy another of the same kind. In turn, they get to defer paying capital gains tax.

According to the IRS, a 1031 exchange can be used with like-kind exchanges, which the IRS describes as those “of the same nature or character, even if they differ in grade or quality.” In other words, a single-family home will be a like-kind exchange with another single-family home and an apartment building will be a like-kind exchange with another apartment building. Though keep in mind that the new property needs to be of greater or equal value.

The proceeds that are received from the sale do not go directly to the investor, but rather they are held in escrow by a 1031 exchange intermediary.

There are restrictions when it comes to these types of property exchanges - especially as it relates to the timing of the new purchase. For instance, you will have 45 days from the sale of the first property to find another property to replace it. Further, the new property must be fully acquired within either 180 calendar days from the sale date or the due date for your tax return for the year of the sale, whichever comes first.

If the guidelines set forth by Section 1031 are not followed precisely, the investor will often be liable for capital gains taxes. This is why it is crucial to work with an experienced team of professionals to ensure that all requirements are met.

Benefits of a 1031 Exchange

As if you can’t tell already, there are many benefits to taking advantage of the 1031 exchange. It is no surprise that more and more real estate investors are finding it to be a highly-effective way of increasing their portfolio.

Below are a few additional benefits:

Increase cash flow. Boosting your cash flow is always good. And with a 1031 exchange, you can ditch properties that are not having a positive impact on your cash flow and replace them with something that will.

Diversify your portfolio (or consolidate). Having a diversified portfolio is a common real estate investment goal. As the wise saying goes, you never want to put all of your eggs into one basket. Of course, it also gives you the opportunity to consolidate, too, such as giving up two of something comparable to one of something else, like selling two small stand alone commercial properties and buying a small strip mall.

Depreciation. In selling an investment property, you will have to pay taxes on all of your recaptured depreciation - and this can be quite a large chunk of change. However, with a 1031 exchange, this depreciation is carried over into the replacement property - ultimately saving you money.

1031 Exchanges at Bulldog Title Insurance Agency, LLC

At Bulldog Title, we understand how important it is for investors to have someone to help guide them through a 1031 exchange investment strategy. These transactions can be fruitful, but they can also be quite complex - and must follow the guidelines set forth by the IRS in the exact manner.

Let us help assist you in all aspects of your real estate transaction, including finding a qualified intermediary. Contact us today at (318) 361-0061 to learn more or to get started.

2 views0 comments

Recent Posts

See All