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Thinking about changing things up a bit. A 1031 exchange is something you may have heard over the years. Maybe a successful investor friend or a real estate agent has mentioned dit is passing. Well, I am here to help give you the highlights, bear in mind I am not a CPA of financial advisor just a friendly real estate broker here to help you succeed in all your Real Estate dreams!
A 1031 exchange is One of the most common real estate investment transactions. Simply put, a 1031 Exchange (also called a “like-kind” exchange) is the swap of one investment property (asset) for another that is similar, which defers capital gains taxes on your profits.
Assume that Lisa has a $500,000 long-term capital gain on her investment property. If she sells the property outright, she’d probably have to pay $100,000 in capital gains tax (20%), plus an additional $19,000 as a 3.8% net investment income tax. On the other hand, Lisa may be able to save $119,000 in taxes if she simply uses a 1031 exchange and rolls over all her sales proceeds into another investment property.
Keep in mind that there’s no limit on the number of times Lisa can use a 1031 exchange. She could use this strategy to continuously roll over her profits from the sale of investment real estate without ever having to pay capital gains tax. Then, when her heirs inherit her properties, they’d receive what’s known as a step-up in basis. This means that if the sell the property at that time, they won’t have to pay capital gains tax either!
There are specific IRS rules which must be carefully adhered to qualify for the deferred capital gains tax. The sale must take place through an intermediary. Title companies are one such option and when coupled with the use of a Real Estate Agent, the easiest. The new asset must also be identified within 45 days of the sale of the current asset and the sale must conclude within 180 days. Finally, the asset must be held for over 1 year before it is eligible for use in a 1031 exchange. Investors use the 1031 exchange to buy and sell assets as new opportunities present themselves, while shielding themselves from immediate capital gains liability.
“Nighty percent of all millionaires become so through owning real estate”
~Andrew Carnegie
Hey there! I’m Maureen, a lifestyle blogger and Real Estate Broker at American Classic Homes Real Estate in the Pacific Northwest. Here to help you find your perfect home and share tips on living your best life in the PNW. Let’s come home together to the Pacific Northwest!
