Is a 1031 Exchange a Good Strategy for You?

Why a 1031 Exchange Might Be a Good Strategy For You

If you own investment property or are weighing your options on whether it is good to buy one, then this blog post is for you.

A 1031 exchange is one strategy to help you effectively manage profits from an investment property as you manage selling one investment property to purchase another. This blog post will define this type of exchange, list the benefits and things to consider, and provide you with other things to think about when it comes to decisions like estate planning.

Defining a 1031 Exchange

This type of exchange is used when an individual decides to sell an existing investment property in order to purchase another one. When one property (investment or otherwise) is sold for more than you paid for it, there is often what’s known as capital gains taxes.

In the case of a 1031 exchange, those capital gains taxes can be deferred indefinitely. This helps an investor potentially move up the investment property chain without having to bogged down by a tax burden.

Further Benefits of a 1031 Exchange

Beyond the capital gains tax deferment, there are other reasons to consider a 1031 exchange. This exchange will help your investment strategy by allowing you to diversify assets or move into investments that offer a better return.
You can also consolidate several properties into one new property. It will also help you reset the depreciation clock for further savings.

1031 Exchanges and Estate Planning

The tax deferment you get with a 1031 exchanges goes with you to the grave. Your heirs on that property received through a 1031 exchange will see that the property value is automatically raised to fair market value, which removes all of the tax deferment debt.

Types of 1031 Exchanges to Consider

There are four types of real estate exchanges that you can consider when you wish to participate in a 1031 exchange, which includes:

Simultaneous exchange: the property you sell and the property you acquire close on the same day.

Delayed exchange: you sell your existing property before you buy another property.

Reverse exchange: you find and purchase an investment property before selling your current investment property (you have 45 days to decide which one to keep and another 135 days to complete the sale of that property).

Construction or improvement exchange: you can make improvements to the property before the exchange occurs.

Specific Requirements with a 1031 Exchange

To take advantage of all the benefits that a 1031 exchange offers, there are some key requirements to ensure you fulfill along the way:

1. You must purchase what is known as a like-kind property (a house for a house or a multifamily unit for a multifamily unit).

2. The investment property you are buying needs to be of equal or greater value.

3. All the proceeds from the sale of the other investment property must be used for the new investment property.

4. The new property must be identified within 45 days and purchased with 180 days.

Issues to Consider

There are also issues to consider before rushing to sign up for a 1031 exchange. This includes:

A. You will have to content with multiple processes and complex rules and regulations established by the IRS. Make any mistakes and there could be penalties. The best way to avoid this is to work with a qualified intermediary who can help you throughout the process.

B. You will not be able to recognize losses because they are deferred just like the capital gains taxes. That means any type of large loss cannot be used to offset sizable profits.

C. You will still face tax liability should you go ahead and decide to sell that investment property at any point without purchasing another one.

Learn More

If you are interested in buying or selling your investment property, please contact myself or my team so that we can help you find the best replacement for your needs. JONES REALTY GROUP of Southern California. 951-970-4771 or email liz@jonesrealtysocal.com