1031 Tax-Deferred Exchanges
Many people are not aware of the benefits that a 1031 tax-deferred exchange can provide when you sell real estate other than a primary or secondary residence. A 1031 exchange is available for any investment property that you own and is especially relevant if, when you sell it, you would make a large profit. The word “exchange” is pretty much a misnomer anymore, as you do not really need to “exchange” your property for someone else’s property. As a seller, your ideal buyer is one who is going to pay you all cash (or cash plus the proceeds from a new loan…..which is the very same as all cash to you). Under the 1031 rules, the closing company would give the proceeds of the sale to a “qualified intermediary ” who will hold them until other investment property can be selected to buy. The IRS rules require that you acquire “like kind” property in order for the transaction to be a valid exchange. You would need to “designate” what you are going to buy within 45 days of closing and then actually close on the purchase within 180 days of closing. There are additional rules to be followed, but generally speaking, so long as you spend at least as much as what you sold your other property for, you will not have taxes owed due to the sale.
Like Kind Property
The term “like kind” is often misunderstood. The IRS divides real estate into 3 categories. (1) Personal residence. Everyone pretty much understands this one. It is the house you call home and would include your “second home” or a vacation home that you use more than 2 weeks per year. A personal residence property is not eligible for a 1031 exchange. (2) Inventory property. A developer who divides 60 acres into lots to sell is considered a dealer. His product, whether it be houses or vacant lots, is called “inventory property” and is not eligible for him to do a 1031 exchange, although as a purchaser, you could acquire his inventory property as your part of the exchange. (3) Investment property. Essentially all other real property is considered investment property. This category can include vacant land, rental houses, condos, apartment complexes, duplexes, ranches, etc. The confusion comes where people think that they must exchange a house for a house…or a vacant lot for other vacant land. While those transactions would be fine, understand that a rental house for a vacant lot is also OK. A piece of ranch land for an apartment complex is equally acceptable. Two vacant lots for a rental house will also be a valid 1031. That is a very simple explanation, but my goal is to make you aware of this benefit and start you thinking “Could this be for me?” I would be happy to go over your particular fact situation in detail with you; just give me a call. More and more of my clients are taking advantage of this huge tax saving benefit, thus saving literally thousands of dollars in taxes.