A Beginner’s Guide to 1031 Exchanges

If you are relatively new to the world of property investment, you may not be familiar with 1031 exchanges. A 1031 exchange, which gets its name fromSection 1031 of the U.S. Internal Revenue Code, helps you to avoid capital gains taxes when you sell an investment property. It also allows you to reinvest the money from the sale to a like-kind property or properties of equal or greater value. The concept of this tax-deferred exchange was first introduced in 1921. This guide breaks down everything you need to know about 1031 exchanges as a beginner in property investment.

Why do 1031 exchanges exist?

The motivation behind the creation of the 1031 exchange istwo-fold:

1. To prevent unfair taxation of ongoing property investments
2. To continuously encourage reinvestment

When should I consider a 1031 exchange?

There are a number of circumstances in which a 1031 exchange might be appropriate and well-suited to your goals. Some of these situations include:

• If you are seeking a property with better return prospects
• If you are looking to diversify your assets
• If you are looking to consolidate multiple properties into one
• If you are looking to divide a single property into multiple assets
• If you are hoping to reset the depreciation clock on your assets

Is there a time limit on finding a new property?

In a delayed exchange, which is the most common type of 1031 exchange, there are two timing rules at play:

1. The 45-day rule: the investor has 45 days to identify the replacement property. The identification of the replacement property must be specified in writing to the intermediary of the sale.
2. The 180-day rule: the investor then has 180 days from the date of the sale closing on the old property to complete the purchase escrow for the new property.

If I want to purchase an international property, am I eligible for a 1031 exchange?

No. In order to qualify for a 1031 exchange, both the old property you are looking to sell and the replacement property need to be located in the U.S.

Should I seek expert advice on 1031 exchanges before pursuing one?

Given the complexity of 1031 exchanges, seeking help from an expert is recommended. When youspeak with a 1031 exchange rules specialist, you not only gain valuable insight into how you can use this tax deferral to your benefit, but you also gain peace of mind knowing that you’re receiving accurate, up-to-date information.

Ultimately, 1031 exchanges can be incredibly useful in the property investment industry. In helping you defer your capital gains taxes, the process of building wealth is greatly facilitated. However, given that the rules surrounding 1031 exchanges are extremely complex, particularly for a beginner, it is advisable to seek the assistance of a specialist. Having a knowledgeable expert in your corner will not only ensure the process is as seamless as possible, but it will give you the peace of mind you deserve.