This is a great strategy to take advantage of…my experience with one of our first rentals was to 1031 exchange the property into two additional rental homes in Chandler. My husband and I were able to turn a monthly cash flow of about $100 into a $600 monthly cash flow. Read on until the end and I’ll have a resource for you to find out how you can do it too!
The cartoon character Wimpy would say that he’d gladly repay you Tuesday for a hamburger today. Some real estate investors say a similar thing to Uncle Sam to be able to hold on to their proceeds from the sale of an investment and agree to pay the tax later.
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The benefit of a 1031 exchange is that it allows the investor to defer the tax due from the sale into the replacement property. This allows more money to be reinvested. In the example shown, the investor has 27% more to invest now by deferring the tax into the future.
The property to be exchanged must be like-kind which means real estate for real estate. Rental property can be exchanged for other rental or investment property. Personal-use properties like a first or second home are not eligible for exchanges.
There are some critical dates that restrict the validity of the exchange. The investor must identify the replacement property within 45 days of the sale of the relinquished property. The replacement property must be closed within 180 days of the sale of the relinquished property.
- The replacement property must be equal to or greater in value, equity and debt than the one being relinquished.
- All net proceeds must be used in acquiring the replacement property.
There are specific rules involved in constructing a valid tax-deferred exchange. There are three professionals that should be involved: a tax advisor, a real estate professional and a qualified intermediary who will assist in the acquisition and transfer of both the relinquished property and the replacement property. Additional information can be found in IRS Publication 544.
This is a very strategic process that should be started prior to listing your rental home for sale. I’d be happy to share the 1031 exchange company we used and to help guide you through the process of exchanging your existing Chandler rental home to purchase more income properties in Chandler or anywhere in the East Valley. Give me a call at 480-355-8645 or email me at Gina@LocateArizonaHomes.com!
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