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1031 Exchange Overview
A 1031 Exchange, named after the IRS Code Section 1031, is a specific transaction that joins the sale of an old property and the purchase of a new property for the purpose of deferring taxes. Qualified properties can be bare land, rentals, commercial buildings, and homes other than your primary residence.
Many investors don't realize that the sale of investment property does not have the same tax advantages enjoyed when selling their principal residence. Profits are often substantially affected by tax consequences since you may end up with a capital gain from the sale. With a 1031 Exchange, you can defer payment of the tax normally due on the sale of your property that has a taxable gain.
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Some of the key points to consider with a 1031 Exchange are:
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You must trade real estate that is held for business or investment purposes for other like investment property.
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1031 Exchanges can not be used in the sale of your primary residence.
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You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.
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You have 180 days to close on the purchase of the new property from the sale closing date on the old. There are no exceptions.
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You can use the 1031 exchange in buying and selling second homes or vacation homes.
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To qualify for a 1031 Exchange, you must use a Qualified Intermediary, who in turn buys the next property you have chosen.
You are not required to exchange all of your cash from the sale of the first property into the purchase of the second. However, if you take proceeds from the first sale, each dollar taken is subject to capital gains tax.
To avoid the tax, you must rollover the entire gain into the new property. You may also exchange one property for several others or vice versa. It does not have to be one for one. |
Benifits: There are many benefits to performing an exchange instead of a sale and new purchase.
•It can make more funds available for the new purchase by deferring any tax payments that would have been due.
•It can also help you with your investment income by allowing you to sell investment properties that aren't giving an acceptable return and use the non-taxed gain to purchase other property that produces better cash flow.
By managing your assets this way you can greatly increase your income.
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One thing to check into is that if you sell your primary residence, and take your $250,000 (or up to $500,000) capital gains exclusion, and then move into your vacation home (and live there for 2 out of the past 5 years), you may be able to sell that home and take another $250,000 to $500,000 in capital gains tax free. For more information, check out IRS Publication 523, Selling your home.
For a copy of the 1031 Exchange rules and guidelines, click here and contact me.
Of course, you should always consult with your Tax Accountant for specific advice concerning all tax matters.
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