A 1031 exchange can change your life. Defer paying taxes on the sale of an investment property and use the proceeds to acquire a property that fits your current needs; increasing your return on investment, generate more income for you in the long run, or simplifying your real estate portfolio all without paying capital gains.
What is a 1031 Exchange?
A 1031 exchange is a tax-deferment strategy that allows real estate investors to sell one property and purchase another property without having to pay capital gains taxes on the sale. To qualify for a 1031 exchange, the properties must be of like-kind, which means they are of the same nature or character, even if they differ in grade or quality. The investor has 45 days from the sale of their property to identify a replacement property and 180 days to close on the purchase. By using a 1031 exchange, investors can defer paying taxes on the sale of their property and use the proceeds to acquire a different property that fits your changing/growing portfolio. Ultimately helping to increase their overall return on investment.
Who Can Use a 1031 Exchange?
Anyone who owns an investment property can use this method of exchange to defer paying capital gains taxes on the sale of the property. This includes individual investors, partnerships, corporations, limited liability companies and trusts.
Example of a 1031 Exchange:
You own a rental property that will sell for $500,000. You purchased the property for $250,000 more than two years ago, so you have a $250,000 capital gain. If you were to sell the property outright, you would owe taxes on that capital gain of $250,000.
Instead, you decide to use a 1031 exchange to defer the taxes. You identify another rental property that you want to buy for $600,000 and arrange for a 1031 exchange with a qualified intermediary.
The qualified intermediary holds the proceeds from the sale of your rental property and uses them to purchase the new rental property on your behalf. Because you used the proceeds to buy another rental property, you can defer paying taxes on the capital gain of $250,000.
If you’d like to successfully complete a 1031 exchange, call or email Realtor/Managing Broker, Jenny Wetzel directly. 253-381-9788, Jennywetzel@windermere.com