|Traditional Sale||VS||1031 Exchange|
|When selling an investment property, taxes may By reinvesting the proceeds from the sale of an investment exceed 20-35% of the capital gain!||By reinvesting the proceeds from the sale of an investment property using a 1031 exchange, you can defer all of those taxes and keep 100% of your capital working for you!|
3 General Rules for 1031 Exchanges:
1 Properties must be “Like Kind”
In a 1031 exchange, the replacement property must be “like kind’ to the relinquished property. The difference in type, grade, and quality does not matter. Generally, any real estate held for business or investment purposes in the U.S. or U.S. Virgin Islands is considered “like kind’.’
‘For example: An investor can exchange a commercial property for residential rental property tor a commercial property, and vice versa”.
A personal residence and vacation home are not considered to be of “like kind” to any real estate held for investment or business purposes, and they cannot be used in a 1031 exchange. (There are other tax shelters that apply to the sale of one’s personal residences)
2 All proceeds must be reinvested
The value of the replacement property must be equal to or greater than the value of the relinquished property to obtain a full deferral. You would have to pay the capital gains taxes on any of the proceeds that weren’t reinvested.
3 Titles must be identical
The ownership title for the replacement property must be identical to the title for the relinquished property.
Benefitting Your Heirs
You can continue to defer capital gains taxes using the 1031 exchange process until it becomes time to pass your assets on to your heirs. When that happens, the basis by which the capital gains are determined steps up to the current market value. Meaning: when your heirs inherit the investment property, they could sell it for its current value and no capital gains would be recognized!
1031 Exchange Timeline:
- Owner ( Exchanger) decides to sell Investment Property & notifies a Qualified Intermediary (aka QI or Accomodator) of exchange prior to the close of the sale.
- Proceeds from sale are transferred to Qualified Intermediary.
- Exchanger Identified Replacement Property(ies) within 45 days Of sale and notifies QI.
- Funds are transferred to seller of Replacement Property(ies). Exchanger has 180 days to close of new Property(ies).