What is a 1031 Exchange?
A 1031 exchange is a swap of one real estate investment property for another that allows capital gains taxes to be deferred.
Who should be aware about it?
Folks who currently own or plan to own investment properties. But also current home owners who want to defer the capital gain taxes on their real estate property, by investing into investment properties in future.
Can you do a 1031 Exchange on primary residence?
1031 Exchange deferral is for investment properties. So by definition primary residence cannot be used for a 1031 Exchange. However, you can convert your primary residence into investment property for a period of 2 years by renting out the place and then doing a 1031 Exchange on the property. If you are married, you can defer up to $500,000 in capital gain taxes by doing a 1031 Exchange.
What are the requirements?
You need to purchase a like-kind property. But the definition of like-kind property is pretty flexible. The new property being purchased needs to be higher in price than the one that you are selling. Else, you will have to pay the capital gain taxes on the difference.
How many times can I do a 1031 Exchange?
You can do 1031 Exchange multiple times, which means you can defer the capital gain taxes for a long time. You might need to hold the investment for a reasonable time to ensure the intent of investment is met.
Who facilitates 1031 exchange?
The 1031 Exchange needs to be facilitated by a 3rd party exchange facilitator who will also hold on to the proceeds from the sale. The 1031 Exchange firm also guides to ensure that all the 1031 exchange rules are being followed and you do not end up in a situation where the transaction does not qualify for the 1031 exchange capital gains deferral.
What are the key things to know?
To do a 1031 Exchange, from the date when you sell your investment property, you have 45 days to identify up to 3 properties that you are planning to purchase. And you have 180 days from the date when you sell your investment property to close on the new property.
Why do you need a Realtor and an effective team who can help with a 1031 exchange transaction effectively?
As the 1031 exchange has nuances and time constraints, it is best to work with a Realtor and a1031 Exchange facilitator that will ensure that all the steps are completed in a timely manner to do a qualified 1031 Exchange.
Below are some additional articles that provide great information on 1031 Exchange. However, it is best to work with a Realtor and a 1031 Exchange Firm to review your particular situation.
https://www.realized1031.com/blog/you-can-do-a-1031-exchange-on-a-primary-residence-heres-how
https://www.ipx1031.com/dream-home-1031/
https://www.1031crowdfunding.com/converting-1031-exchange-to-principal-residence/
https://www.1031exchange.com/faq/
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