Understanding the ins and outs governing 1031 tax deferred exchanges can certainly help real estate investors as they buy and sell their investments. 1031 tax deferred exchanges are also known as “like-kind” exchanges because you can swap one property for another without paying any capital gains tax on the sale. While it may seem rather easy to understand 1031 exchanges, they come with numerous rules and regulations. Here’s a quick look at some of the specifics of 1031 tax deferred exchanges.
Not Allowed with Personal Property
The 1031 tax deferred exchange has to be used for investment or business property. It cannot be used on your primary residence without the personal residence becoming an investment property first.
Properties Don’t Have to Be Identical
The name, “like-kind” can be confusing. You don’t have to exchange a single-family investment home for another single-family home. Instead, you can exchange the property you’re selling for any other property, such as a single-family home for an apartment building, a gas station, or even for raw land. The rules are rather liberal on the type of property and have more to do with the value.
Any Leftover Cash Will be Taxed
If you happen to have cash left over during the sale and purchase of properties, the intermediary will pay it to you after the 180-day period. This cash is known as the “boot” and it will be taxed. Usually, it’s taxed as a capital gain.
Not Limited to Just One Property
When you sell a property and you plan to use the 1031 deferred exchange, you don’t have to purchase just one replacement property. You can purchase multiple properties for your exchange. For example, if you sell an apartment building and you want to move into single-family homes, you may need to purchase three homes to match the value. This is allowed within the regulations of 1031 tax deferred exchanges.
Vacation Homes are Allowed, but Tricky
While you may be able to use a 1031 tax deferred exchange for a vacation home, it’s not exactly straightforward. You will have to turn the property into a rental property first and rent it out for at least six months before you can qualify for an exchange. In fact, you will likely need to actually have a tenant or you may not qualify to use the exchange.
You Get 6 Months to Close
Once you decide you want to use the 1031 tax deferred exchange and you sell one of your investment properties, you only get 6 months before you have to close on the replacement properties. Moreover, regulations require you to identify and designate replacement properties within 45 days; afterward you have another 135 days to close on the properties.
There are many other specifics to 1031 exchanges and it’s best to consult the right professionals before making your decision to sell and use this type of exchange. With the right team of professionals on your side, you will know exactly how to use 1031 tax deferred exchanges to gain maximum benefit and protect all of your investment from capital gains taxes.
Are you curious to learn more about the possibilities for the sale and reinvestment of your real estate holdings? Contact Collin O’Berry of Altamont Property Group with Keller Williams Realty to get started! We can be reached at altamontpropertygroup@gmail.com or 828-782-5582.
