If you’re thinking about rearranging your real estate portfolio, a 1031 Exchange can help you replace some of your weakest links while deferring taxes. This tax-deferral tool is a great strategy for real estate investors, but there are a few things to know before you get started.
In this post, you’re going to learn five things you need to know about the 1031 Exchange!
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You can’t do it alone! If you’re planning on utilizing a 1031 Exchange, you must work with a Qualified Intermediary. A Qualified Intermediary facilitates the entire exchange, holds the funds, and ensures the transaction is in compliance with the IRS guidelines. You must contact the Qualified Intermediary before you sell your property. Otherwise, you will have been in receipt of funds and liable for capital gains taxes. Need a referral? We recommend Asset Exchange Co.
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The 1031 Exchange is only applicable to properties used for business or investment purposes. You cannot use this strategy on a primary residence or vacation home.
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A 1031 Exchange is only applicable to like-kind properties, but this actually isn’t as limiting as it sounds. “Like-kind” does not refer to the type or size of the property, it simply means that the property is used for the same purposes. As a real estate investor, this shouldn’t worry you too much.
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If you’re a procrastinator, the 1031 Exchange is not for you! This strategy involves very strict guidelines, with no exceptions. The IRS requires that you identify a replacement property in 45 days, and you must complete the entire exchange within 180 days.
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If you want to defer all capital gains, the replacement properties must be of equal or greater value of the relinquished property. If not, you will have to pay taxes on the difference.
Want to learn more about 1031 Exchanges? Check out our Ultimat Guide!
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