1031 Exchange – An Investment Tool in Real Estate

At first glance, when you see the numbers 10 and 31 put together, you might think that we were talking about October 31^st, or Halloween. After all, it is an awesome celebration…when else can you go to someone’s home and demand candy? However, this combination of those numbers is a fantastic investment tool in the world of real estate. Yes, I am referring to the 1031 exchange. I am Howard Freedland with Echo Commercial, and this is your tip of the week.

A 1031 exchange is a swap of one real estate investment property for another which allows capital gains taxes to be deferred. The name is derived from Section 1031 of the IRC or Internal Revenue Code. It has a lot of detail to it, so reviewing it with a proper financial advisor is very important.

The Basics

-A 1031 exchange is a tax break. You can sell a property held for business or investment purposes and swap it for a new one that you purchase for the same purpose, allowing you to defer capital gains tax on the sale.

-Proceeds from the sale must be held in escrow by a third party, then used to buy the new property; you cannot receive them, even temporarily.

-The properties being exchanged must be considered like-kind in the eyes of the IRS for capital gains taxes to be deferred.

-If used correctly, there is no limit on how frequently you can do 1031 exchanges.

-The rules can apply to a former principal residence under very specific conditions.

Now, there is always fine print, and that is where things have the chance to go sideways. If they do, the government can claim 15-25% in taxes – not to mention your Halloween candy – so pay attention to those details.

Those interested in profiting the most will learn about rules on the following categories:

-like properties

-what is a principal residence

-the special rules for depreciable property and depreciable recapture

-the 2017 Tax Cut and Job Act which eliminates the exchange of personal property from qualifying 1031 exchanges

-THE TIMELINE! Know your 45 and 180 day rules, which run concurrently

-the Reverse Exchange

The bottom line is that like any investment, it is the investors responsibility to understand all that goes into the tool that they invest in.

So, in review, the 1031 exchange can become a very positive investment tool to use. Consult with your financial advisor and CPA so that you understand the tax implication on any investment tool you choose. Otherwise, instead of enjoying your “Halloween” you will find yourself crying over your candy as you receive a hefty tax bill. This has been Howard with Echo Commercial Real Estate with your tip of the week