Are you thinking about selling your investment property? If so, a 1031 exchange might be an excellent option! This effective tool, also known as a “like-kind exchange,” allows investment property owners to defer a variety of taxes by reinvesting their funds into another piece of property.
Qualifying for this incredible wealth-building opportunity isn’t as difficult as you might think. Here’s what you need to know.
What is a 1031 Exchange?
Section 1031 of the Internal Revenue Code provides the ability to exchange a business, income, or investment property for “like-kind” property. Doing so allows the property holder to defer federal and state capital gains taxes and the 3.8% Medicare tax. A 1031 exchange also defers the recapture of depreciation.
The primary benefit of a 1031 exchange is the ability to hold onto your buying power. Without it, a property sale would result in you paying a significant portion of your profits to the government. This would leave you with less money to purchase a new investment. By taking advantage of a 1031 exchange, you’re able to keep all of your money working for you.
Eligibility Requirements
If you currently own business property or a piece of real estate held for income or investment, you likely qualify for a 1031 exchange. This opportunity is open to individuals, S-corporations, C-corporations, LLCs, trusts, general partners, limited partners, and any other tax-paying entity.
The primary requirements for qualifying are that (1) you have a qualifying property, and (2) you meet the time restrictions.
When you sell your property, you’ll have 45 calendar days from the closing date to identify your replacement property. You also only have 180 calendar days from the date of your first property closing to close on the replacement property. In addition, you must use a “qualified intermediary” to oversee the transaction and ensure all 1031 exchange requirements are met.
Like-Kind Property
Finding a “like-kind” property may seem intimidating. However, it’s not as complicated as you might think. As long as the new property is located in the United States and it’s used in business or held as an investment or income-producing property, it’s considered a “like-kind” property.
No matter what kind of investment, income, or business property you currently hold, you’re able to exchange it for a variety of different properties. This may include a vacant lot, apartment building, commercial building, or even a single-family residence (as long as it’s not your primary residence or second home).
In some cases, a vacation home may qualify for a 1031 exchange. However, you must show that you have “limited personal use” of the property. This means that the property owner or the owner’s family must not personally use the property for more than 15 days per year or 10% of the number of days during the year that the property is rented at the fair market value.
Personal property, like gold coins, aircraft, computers, and equipment, may also qualify for a 1031 exchange. However, the rules regarding these exchanges are much more specific. If you’re considering engaging in any kind of a 1031 exchange, it’s a good idea to consult with a tax professional before you get started.
Delaware Statutory Trust
While finding a “like-kind” property isn’t necessarily difficult, many property holders are selling their real estate holdings because they no longer want to deal with the hassles of managing physical property. The good news is, you can qualify for a 1031 exchange without the ongoing effort of managing a replacement property.
A Delaware Statutory Trust (DST) is an investment vehicle that serves as a like-kind investment property. It allows accredited investors to continue owning real estate property and enjoy the benefits of a 1031 exchange, without the headaches that come with property management.
To learn more about how to qualify for a 1031 exchange and explore whether a DST is appropriate for you, send us a message or give us a call at 415-991-1031. Remember, you only have 45 days from the sale of your property to find a replacement property, so don’t delay!
This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Because investors’ situations and objectives vary this information is not intended to indicate suitability for any particular investor.
DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
Securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Insurance offered through Concorde Insurance Agency, Inc. (CIA) Thornwood Financial is independent of CIS, CAM and CIA.
