1031 Exchange – Using a 1031 Exchange to Buy and Sell Investment Property – Did you know that you can use a 1031 Exchange to defer capital gains taxes when you are selling and buying investment property? Here’s some info to clarify Section 1031 of the Internal Revenue Code. It’s all about deferring capital gains taxes by reinvesting the proceeds from the sale of a business or investment property.
Rule 1. It must be a “like-kind” exchange. That means any type of real estate, as long as it’s used as an investment or for business. A personal residence cannot be used for a 1031 exchange. (There is an exclusion for capital gains on a primary residence as long as the property is occupied as a primary residence 2 of the past 5 years.)
Rule 2. To defer capital gains the replacement property must be of equal or greater value. If the replacement property is a lower value than the property being sold, capital gains tax will be paid on the difference. That is called the “boot” and is fully taxable at federal capital gains tax rates.
Rule 3. The replacement property in a 1031 Exchange must be identified within 45 days of the closing date of the property being sold.
Rule 4. The replacement property must be purchased within 180 days of the closing date of the original property.
Rule 5. A 1031 Exchange can only be used for investment properties. Buying a duplex and living in half and renting out the other half will not qualify.
Rule 6. To conduct a 1031 Exchange you must use a “Qualified Intermediary”, an independent third party recognized by the IRS as facilitators of 1031 exchanges. Real Estate agents, real estate attorneys and accountants are not qualified intermediaries.
Rule 7. Properties sold and purchased in a 1031 Exchange must be held for investment or business use. Neither can be your personal residence. A vacation home or second home is usually excluded from a 1031 exchange. Property is considered a 2nd home if it’s used for personal purposes more than 14 days per year or for more than 10% of the time the property is rented at market rate, whichever figure is greater.
Using a 1031 Exchange can be an excellent tool to use if you’re buying or selling investment properties. Be sure to set up the 1031 Exchange before closing on the property being sold. If you take possession of the proceeds the ability to do a 1031 exchange is gone. It must go to the intermediary, much like moving funds to different retirement accounts.
If you’re thinking of buying or selling an investment property on Anna Maria Island in Florida please contact us. We have personal experience with using 1031 Exchanges and are happy to help. Jen and Mark Bowman, Keller Williams on the Water 941-840-0117. If you’re selling or buying elsewhere, we can also refer you to an agent who can assist you.
Legal Disclaimer- This is not to be construed as legal or accounting advice, just facts from what we know as we have personally used 1031 exchanges to defer capital gains and buy more property.