Investor Series – 1031 Tax Free Exchanges
November 15, 2022
This is another installment on our investor series articles. Today we are going to discuss 1031 tax free exchanges.
A 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term comes from Section 1031 of the IRS Internal Revenue Code. IRS has some rules regarding the exchange and how it must go down. There are a few exceptions, but it basically boils down to exchanging “like-kind” property for another.
For example, let’s say you’ve owned a 4 unit for a few years and want to get into a different 4 unit in a better part of town and you plan to hold this new property for a few years as well. This is a very “like kind” exchange and would likely qualify without any problem. Its gets more tricky when you want to exchange say a vacant piece of land and buy an industrial building with the proceeds. It would be good to consult a 1031 Tax Free Intermediary specialist to discuss complex exchanges to make sure they qualify. You’ll need to pick an intermediary at some point because you can’t receive the proceeds on the sale. It must to go the intermediary and they handle the transfer of funds for the new purchase.
The exchange isn’t exactly a swap of properties. It’s simply an opportunity for you to sell one type of real estate and get into a different one within a certain amount of time. The rules state that once you close on your existing property you have 45 days to identify the property you wish to exchange into and you have 180 days to close on the new property. Some people will put forth up to three identified properties they can choose from and that’s fine. As long as the property you picked is on that list and it meets the requirements and timeframes you should qualify for the tax exemption. Keep in mind the 45 day clock and the 180 day clock run concurrently from the day you close on the existing property.
There is virtually no limit how many times you can do this so you can keep parlaying your profits into bigger and more lucrative investments and reap the benefits