1031 Exchanges- What You Need to Know

1031 Exchanges- What You Need to Know

You may be familiar with the general idea of this term. You may have heard of it in regards to real estate and investing. But, do you actually understand the meaning of what a 1031 Exchange is? Let’s break it down with what you need to know about 1031 exchanges in regards to real property.

To start, what is a 1031 exchange?

Basically, it is as it sounds, an exchange, as in a swap of one investment for another investment. 1031 is a section of Internal Revenue Code and it is favored in real estate particularly for the tax benefit. If you participate in a 1031 exchange, tax will either be limited or not taxed at all during the exchange. The benefit for a real estate investor is the profit gain potential during a swap without having the tax, and that there is no limit on how often you can do a 1031 exchange. As long as you are exchanging, you avoid the tax. In addition, when you do finally sell that property, you will only pay one tax. With this of course come rules and restrictions. You really want to be sure you are using the 1031 properly in order to benefit from it.

Important Key Factors

A 1031 is designed for investments, not necessarily personal use. However, in certain cases, some personal property can apply. The idea of the exchanges, are to be “like-kind,” which means of similar kind for exchanging. Furthermore, “like-kind” can be a broad term. For example, you can exchange land for an apartment. Timing is very important during exchanges. Designated Replacement Property This is the topic where timing matters. Upon the sale of your property, there is an intermediary who will receive the cash for that property, not you. You then have 45 days from the sale to designate a replacement property or multiple replacement properties. The replacement property is the property you plan to acquire, and it must be in writing and given to the “intermediary.” This is to keep the 1031 exchange legitimate. You can have up to 3 replacement parties designated, within set forth rules. The other important timing key factor to know is the closing timeframe. During this exchange, within 6 months of the close on the new property, the old must sell. You definitely have to be careful with math here!

This is a brief breakdown of some of the need to know parts of 1031 exchanges, as it relates to real estate investments. 1031 exchanges can be tricky and beneficial. Know your investment benefits and risks.

For more information on 1031 exchanges, contact your local Contra Costa County real estate investment experts at The Irvin Team.

This 1031 Exchanges- What you Need to Know information is brought to you by: The Irvin Team.