1031-Exchanges in Real Estate
Do you have questions like?
-
How can I reduce my real estate taxes when buying or selling real estate?
-
What is a 1031 Exchange?
-
What do 1031 Exchanges do?
-
How do I do a 1031 Exchange?
A 1031 exchange is a legal process that allows a person to exchange a group of properties for someone else's group of properties without being liable for taxes. The group can consist of one property or several. There are special actions that you must perform in order for this process to be performed successfully, but they really aren't as complicated as some people may think.
If you're looking to sell a high priced property then the 1031 exchange can help you roll over the value in that property completely into another property without a capital gains tax. Are 1031-Exchanges legal? Absolutely! 1031 Exchanges are totally legal. Basically the government allows for the exchange of real estate tax-deferred as long as certain conditions are met. The government taxes sales of properties, but a 1031 Exchange is not considered a "sale".
Conditions of a 1031 Exchange:
-
When purchasing a property to exchange, you'll need to write in the purchase agreement the intent to use the property as part of a 1031-exchange. (For the exact 1031-exchange language, consult an attorney.)
-
You have to choose a property within a certain time period to exchange with.
-
The property must be investment property, not your primary residence.
-
Properties held for less than 1-year and bought with the intention to "Flip" may not be valid.
An example of a 1031-exchange is:
Seller Sam has a large rental house he's selling for $500,000. Seller Sam has had the property for more than one year. In fact he has owned it for seven years. Since he has had it for more than one year he only has to pay long term capital gains taxes on this sale of 10%. He paid $100,000 for the property seven years ago. 10% of the $400,000 property value profit comes out to $40,000 in taxes. Seller Sam wants a way to avoid having to pay those taxes and his need for the $400,000 right now is not immediate. It would be better if he could wait until he is of retirement age to use this money rather than taking out now since he is only 35 years old and already has a good paying job. Seller Sam's agent from Engle Realty tells Sam that there is a way that can give him just that. A 1031 exchange. After going over the details, Sam's real estate agent helps find Sam a twelve unit apartment complex just north of LSU's campus. The price tag is $525,000.
Sam's real estate agent helps negotiate the property down to $500,000 and Sam buys the property within just two weeks after he closes on the sale of his rental house. The $40,000 tax is actually "in" the new property. Additionally, Sam is making $5,000 a month on his new rental property.
With a skilled real estate broker, a certified public accountant (CPA), and a knowledgeable attorney, you'll find that a 1031 Exchange may be very good option when investing in real estate.
