What is a 1031 Exchange?
A 1031 exchange is a way to sell and buy investment properties without paying taxes right away. According to Section 1031 of the tax code, if you sell a property and buy another one that qualifies, you can avoid paying capital gains tax at that time. You have 180 days to purchase a new property after selling the old one.
What Counts as Like-Kind?
The properties don’t have to be the exact same type, just similar in use. Almost any real estate can be swapped for another, like trading land for an apartment building or a rental house for a shopping center. But you can’t do this with your home; it only works for investment properties, like rentals or places you plan to flip.
Key Rules to Know:
• Neutral Helper (Qualified Intermediary) – A third party holds the money from your property sale to ensure you don’t touch it during the exchange process.
• 45 Days to Decide – After selling your property, you have 45 days to pick potential new properties you want to buy.
• 180 Days to Buy – You need to buy the new property within 180 days of selling the old one.
Note that:
➣ The new property must be worth as much as or more than the old property.
➣ All the money from the sale of the old property must go into buying the new one.
➣ Whoever owned the first property (you or your company) must also own the new one in the same way.
Other Important Tips:
• You can list up to three potential properties to buy, as long as you purchase at least one of them.
• If you list more than three, their total value can’t be more than twice the value of the property you sold.
• If you ignore the value limit, you must buy at least 95% of the total value of the properties you listed.
Following these rules lets you defer taxes, which means you don’t pay them right away. For example, if your property’s value increased from $1 million to $2 million, normally you’d pay taxes on the $1 million gain, which could be $200,000. But using a 1031 exchange correctly lets you keep that money working for you in a new property instead of paying it as tax.
These rules are strict, and mistakes can cause you to lose the tax benefits, resulting in a hefty tax bill. It’s wise to talk to a tax expert or an experienced realtor to guide you through the process.
Know what is a 1031 Exchange, click here.
Ready to sell? Know your home’s worth, click here.
Homes for sale in Carmel Valley click here.
Shirin Rezania Ramos | 858.345.0685 | www.shirinramos.com | Compass, DRE 0203379
