1031 Exchanges- Why the time is NOW

1031 Exchanges- Why the time is NOW

There is no doubt about it, the time is now to learn more about and participate in 1031 exchanges. A 1031 exchange is an excellent use of the tax system, in the form of a deferment that has made many investors very successful. 2016 is becoming known as the best year to get involved in using 1031 exchanges.

As an introduction for new readers, you will most likely want a clear definition in what a 1031 exchange is. 1031 is simply the IRS code which allows for an exchange to take place while deferring the capital gains taxes when the property is sold so long as another similar property is purchased using the profit gained from that sale. Sounds complicated but it is commonly used, and makes a lot of sense for investors. Saving yourself from the taxes is not the best part. There are many other gains to look at when using a 1031 exchange. With this exchange, you can move your investments around and even exchange for a low maintenance investment property. It is mainly viewed as a swap. However, swapping with just someone else doesn’t actually happen that often which is when the third party comes in.

Known as a delayed exchange, this is where you exercise a middleman to hold the funds for a time period after you sell your property. This provides you time to buy the replacement property, which remains the equivalent to a swap. The general time period for this is 45 days.

When Is the Best Time?

Obviously, you do not want to participate in this type of exchange if you are clearly going to lose money. What you are looking for here is advancement in your currently owned rental property. If the property is worth more right now that what you bought it for, you can really benefit from doing the 1031 exchange.

Strategies

Eventually, an investor will cash out of the exchange process and pay taxes as this is only a deferment, not a freebee. In the meantime, you have the opportunity to trade properties as you see fit until the time comes for you to incur the tax obligation.

The rules are that the replacement property must be similar to the sale. It must either be the same of higher of a loan amount. This rule goes by the value, not the loan amount. If you owe less, that is great but you must swap for a property that is either the same amount market value, or more.

There are 4 total types of exchanges. The first is a simultaneous exchange which allows for investors to swap on the same day, in a direct way between 2 parties. The second and most popular is the delayed exchange which was previously explained. The third type of exchange is known as a reverse exchange where you basically buy the property first and then pay later. This usually must be paid in all cash because you cannot get a loan due to it not being possible to be on the title of both the properties in the sale at the same time. The fourth and final type of exchange is the constructional/improvement exchange. If you use this type of exchange, you want to buy a property for less than the one you sold which would make it not like-kind. However, you can use the extra funds to build or improve the property to make it like-kind for the exchange.

Let this all sink in for now. As with any tax rule, there are always exceptions which we will go into next! In the meantime, please contact The Irvin Team for all of your real estate investment needs!

This 1031 Exchanges- Why the time is NOW information is brought to you by: The Irvin Team, Your Contra Costa County Real Estate Investment Experts!