A 1031 exchange is an option available in real estate where the owner of a property can swap out one of their investment properties for another investment property that lets the capital gains taxes be deferred. This is a popular option, as it lets investors limit their taxes, as long as they are still investing in a real estate property that qualifies. The term comes from the rules in Section 1031 of the Internal Revenue Code.
Of course, you have to understand that it’s not as simple as finding a property you like and swapping it out. Certain requirements need to be met before they can be used.
For example, when you sell your property, the proceeds need to be held in escrow by a third party. Those funds must then be used to buy the new property. The money can’t be used for any other reason.
Additionally, the new property you are buying must be considered like-kind by the IRS. It doesn’t have to be the same type of property. For example, you don’t have to get another apartment building if you are selling an apartment building. They do need to be investment properties. The rules are generally liberal here, but you will want to speak with an expert when you are searching for like-kind properties just to be sure.
When used correctly, there is no limit on how often you can do these exchanges. You could technically put off the capital gains taxes for years. This can be beneficial to any real estate investor, particularly those who have a lot of properties, as you could save a lot in taxes with 1031 exchanges.
Once you sell your property, you will have 45 days from that sale to designate a replacement property that you want to buy. You also need to close on that new property within 180 days of selling the old property.
Because the 1031 exchange can be confusing, and there is a chance that you could do it wrong if you aren’t careful, it’s best to get some help. You will want to take the time to speak to a real estate attorney at Gandhi Selim Law who can help you understand what needs to be done and whether the property you are considering will qualify. It’s always better to be safe rather than sorry.
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