1031 Exchanges - Real Estate
Many of our clients throughout the past have elected to utilize 1031 Exchanges (real estate “like-kind”) to defer capital gains tax on the sale of investment properties throughout the United States. In simple terms this means that property held by the client for productive use in a trade or business, or for investment purposes can be exchanged for more real property as long as the properties are of “like-kind”, regardless of grade or quality. There are many guidelines that must be followed, but this tax benefit can result in deferred capital gains of up to 35-40%. Depending on the scenario, this can result in a large amount of cash that can be saved to further invest in real estate to create additional passive cash flow.
Here are a few of the main benefits to utilizing a 1031 Exchange:
- Ability to defer capital gains taxes of up to 35-40%
- Expand your real estate portfolio to other areas across the United States
- Diversify the type of product that you are investing in - single family, multi family (must follow like-kind guidelines from tax code)
- Continue (and most likely increase) cash flow from your current portfolio
Here is a very simple summary of the typical timeline of a real estate 1031 Exchange:
- Client determines they would like to sell their current investment property
- At this time it is beneficial to go ahead and get a qualified intermediary (such as IPX Exchange Services) involved so they can be in touch with your real estate agent and title company
- Subject property goes under contract
- As the buyer completes their due diligence and closing approaches, the title company will communicate with IPX to ensure funds are deposited with the qualified intermediary at closing
- Subject property closes
- At this time your 1031 Identification Period and Exchange Period begins
- From the date of closing you have 45 days to identify your replacement property or properties (more explanation below on the 3 Property Rule, 200% Rule, and 95% Rule)
- From the date of closing you have 180 days to close on the identified replacement property or properties
- Important - did you have a loan on the property that you sold that was paid off? If so, this will be recognized as a gain and will be taxed. You can defer these taxes as well by acquiring a new loan on one or multiple properties that you purchase (keep in mind you must still qualify for the new loan, etc.)
- Properties identified
- As you work with a real estate agent in the area that you are purchasing real estate, they will be the one to help you search for replacement property. As properties are identified and put under contract they will need to be added to the form that your 1031 company provides (this is the form that is due on the 45th day following the closing of your original property).
- Tip: be sure that your agent is including everybody in the loop (title, 1031 exchange company, you, and the lender - if applicable) to make sure that all items are being taken care of. Also ensure that the correct 1031 exchange language is place in each contract in special provisions as well.
- Closing on new property
- As you begin to close on your replacement property/or properties, the 1031 intermediary will draw up the necessary paperwork for you to sign that will be provided to title to ensure funding at closing.
Things to look out for:
- Make sure you exchange funds are safe (use a reputable 1031 Exchange company)
- Make sure you are utilizing a qualified intermediary
- Work with a qualified real estate agent that is aware of 1031 guidelines and has worked a 1031 exchange in the past
- Start looking for properties as soon as possible
Companies Our Clients Have Used
Greg Lehrmann, J.D.
Asset Preservation, Inc.
1213 Somerset Boulevard, Suite 100
Colleyville, TX 76034
DISCLAIMER: Visions Realty & Investments, Inc. does not provide legal, tax, or investment advice. All information herein is general in nature and should not be considered legal, tax, or investment advice. We recommend that you consult an attorney or tax professional regarding your specific situation. Nothing contained herein should be relied upon as a promise or representation as to the future. Recipients should conduct their own investigations and analysis of any real estate transaction that they are involved in. No warranty is given concerning the suitability of this information for any application.