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1031 Exchange Investment Property

Smartland® offers investors a strategic plan to maximize real estate profits, while diversifying their real estate investment portfolios. Through a 1031 Exchange, investors can experience major tax benefits (limited to NO taxes) on their real estate property purchases. This exchange is referred to as the IRC Section 1031 Exchange.

The term “1031 Exchange” has become more prevalent in today’s conversations, especially among real estate investors, title companies, realtors and business professionals. There are some who believe “1031 Rollover” is a more accurate term for this as “Exchange” can be misleading. There is some truth to that, especially since through this process you are essentially “rolling over” one gain into a new property (gain).

So, what exactly is a 1031 Exchange?

Also referred to as a like-kind exchange, (because theoretically you, or the investor, are trading one property for another property that is similar) a 1031 Exchange is essentially, trading one business, or investment, for another business, or investment. Both the old business/investment and new business/investment must be utilized in a trade or business, or investment properties. Even though the trades are taxable as sales, most times investors pay no tax or limited tax at the time of the exchange. These major tax savings are the reason so many investors are choosing to participate in the 1031 Exchange.

Rules and Requirements for participating in a 1031 Exchange

  • You cannot flip properties.
  • Properties must be in the United States.
  • Primary residences are not eligible.
  • You, as the investor, must identify the real estate you’re purchasing/rolling into within 45 days of the closing of the property you’re selling. For example, you are closing (selling) on one of your investment properties on March 1st. You have 45 days after March 1st to identify all/any of the investment properties you intend to purchase as part of the 1031 Exchange program. Additionally, you must close on those identified properties within 180 days after the closing of your initial sale. Any properties considered as part of your 1031 Exchange must be properties you identified within those initial 45 days.
  • You cannot touch the proceeds from your sale. This is untouchable and rolls into the purchase of the new property(ies).
  • Title must match exactly. If Sarah owns the building that houses her law firm, and her name is the only name on the title, then when she purchases one/any of the additional properties, her name must remain the only name on those titles as well. She cannot add a partner, husband, etc. to any future title (of properties included in the 1031 Exchange).
  • Properties must be of equal or greater value. You cannot sell an investment property worth $400,000 and rollover to an investment property worth $300,000.

An example of what does not constitute eligibility for a 1031 Exchange: Sarah is an attorney and owns her firm but leases the building in which her law firm is housed. She wants to sell her business and buy a loft downtown. Reason being: She cannot sell a business for a primary residence. A business is not real estate and a primary residence is ineligible.

What are the benefits to a 1031 Exchange?

The benefit to a 1031 Exchange (a term which has also become a verb as in, “let’s 1031 that asset for another”) is that, even though the trades are taxable as sales, most times investors pay no tax or limited tax at the time of the exchange. Additionally, there are no limits as to the number of times you can conduct a 1031 Exchange. This allows you to roll over your gain from one 1031 Exchange to another, and another.

Tax benefits are plentiful, apart from the initial limited-to-no taxes at time of exchange. You aren’t required to cash out or recognise your 1031 Exchange assets as a capital gain. This means you can grow your investment tax deferred

One important thing to consider when looking into a 1031 Exchange is the rules are different when you bring a depreciable property into the formula.

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