1031 Exchange and what you need to know
If you are interested in investing in real estate or are currently an investor you are probably familiar with the 1031 exchange. This exchange is basically a way for real estate investors to defer capital gain taxes on there real estate investments. This exchange works by investors selling one investment property for another property or multiple properties. Selling a home with capital gains is a taxable event, in order to avoid taxes a real estate investor may use a 1031 exchange.
What do you need to know about a 1031 exchange?
You Must Purchase a “like kind” Investment Property
In order to qualify for a 1031 you must purchase a “like kind” property this is a loose term for real estate, almost all real estate is considered like kind. You do not need to purchase a house similar to the previous one, for example, a duplex and a apartment complex are “like kind”. It is important to note that the investment you purchase must be equal or larger value than the previous investment, for example, if you have a $500,000 dollar home and currently have $100,000 in equity you will need to purchase a home that is equally worth or worth more than $500,000 and have equal equity or more equity in the home upon purchasing.
The 45 Day Identification Window
In order to qualify for a 1031 exchange you will have a 45 day window from the date you sell the relinquished property to identify potential replacement properties, there can be multiple properties (up to three) identified and under the “like kind” rule these must be equal to or greater than the relinquished property. The identification of the future property(s) needs to be in writing and signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. As far as a time frame for closing the future home you will need to close on the exchange either 180 days after the relinquished property close date or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier.
The Same Title Holder/ Tax Payer
“The name and tax return that appears on the property title for the property that you sell will need to be the same as the name and tax return that you provide when purchasing a new property. An exception is allowed if you’re the sole member of a limited-liability company wherein the property is passed from your company to you.” (AB Capital)
For More information on the 1031 exchange check out the IRS website that lays out the rules of the exchange in detail
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