USING 1031 TO DEFER CAPITAL GAINS AND BUILD WEALTH

Written By Jennifer Wilson

If you are considering a 1031 exchange -or just curious – here are the basics you need to know. You should always consult your CPA prior to using a 1031 exchange.

What is a 1031 Exchange?

A 1031 exchange is a swap of one real estate investment property for another that allows capital gains taxes to be deferred. IRC(Internal Revenue Code) Section 1031 has moving parts that real estate investors must understand before attempting to use it. A 1031 exchange is a swap of one investment property for another. Most swaps are taxable as sales, although if yours meets the requirements of 1031 exchange, you’ll either have no tax or limited tax due at the time of the exchange.

You can change the form of your investment without cashing our or recognizing a capital gain. There is no limit on how frequently you can do a 1031 exchange. You can roll over the gain from one piece of investment real estate to another and another. You avoid paying tax until you sell for cash many years later. If it works out, you’ll pay only one tax at a long term capital gains rate.

To qualify, most exchanges must merely be of a like-kind. You can exchange on business for another but there are traps for the unwary.1031 is for investment and business property, though rules can apply to former principal residence under certain conditions. There are ways that you can use 1031 to swap vacation properties, but this loophole is much narrower than it used to be.

Timelines

45-Day Rule

Once the sale of your property occurs, the intermediary will receive the cash. You can’t receive the cash or it will stop the 1031 treatment. Within 45 days of the sale of your property, you must designate the replacement property in writing to the intermediary, specifying the property that you want to acquire. The IRS says you can designate 3 properties as long as you eventually close on one of the,.

180-Day Rule

You must close on the new property within 180 days of the sale of the old property.

Reverse Exchange

It is possible to buy the replacement property before selling the old one and still qualify for the 1031 exchange. The same Rule periods apply. To qualify, you must transfer the new property to the exchange accommodation titleholder, identify a property for exchange within 45 days, and then complete the transaction within 180 days after the replacement property was bought.

There are many factors and rules that pertain to a 1031 Exchange. I suggest you reach out to your CPA and explore all of your options and find out what is in the best interest of your business. A 1031 Exchange can be used as a tax-deferred strategy to build wealth. However, the many complex moving parts not only require understand the rules, but also enlisting professional help – even for savvy investors.

For more information reach out to me.

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