1031 Exchange Real Estate: What You Need to Know

Do you want to know more about 1031 exchange real estate but don't know where to start? Keep reading and learn more here.

Investors are very active in the current real estate market. They bought about 16% of all homes in the U.S. during the second quarter of 2021.

It’s a great time to get involved in real estate. There are plenty of opportunities for new and established investors alike.

The mistake that investors make is that they hold onto a property for too long because they don’t want to pay capital gains taxes.

You can take advantage of 1031 exchange real estate. It’s a way to lower your taxes when you sell a real estate investment property.

Read on to find out more about 1031 exchanges.

What Is a 1031 Exchange?

A 1031 tax exchange refers to the part of the IRS tax code that allows businesses to defer capital gains taxes on real estate transactions.

This is one of the most overlooked advantages of real estate investing. This applies to all real estate investors, as long as you follow the rules of the 1031 exchange.

Beginner investors can use a 1031 exchange as leverage to grow their real estate business. You can start out with one small property.

You can realize the capital gains on the property and upgrade to a larger property. The taxes on the capital gains get deferred until you sell that second property.

It’s possible to do another 1031 exchange on a third property. You’re only going to defer the capital gains. Once you sell a property and don’t have a replacement, you will owe capital gains taxes.

Important 1031 Exchange Details

Not every transaction qualifies for a 1031 exchange. There are 1031 exchange rules that you have to follow in order to realize the tax deferment. Not following the rules results in a failed exchange, and you’ll end up owing capital gains taxes.

The first rule is that it has to be an investment property. The second is that it has to be a like-kind property.

You need to work with a qualified intermediary to handle the transaction. You’ll sell your investment property, with the proceeds going to the qualified intermediary.

You have 45 days to find a replacement property. The sale has to be completed within 180 days from the sale of the original property.

It’s also possible to do a reverse exchange, where you purchase the replacement property first and then sell your investment property.

Bear in mind that these rules may change in the next year or two. There’s a bill that would limit capital gains on like-kind real estate transactions to $500,000 per year for single tax filers and $1 million for married tax filers who file jointly.

1031 Exchange Real Estate: Know the Basics

A 1031 exchange real estate is a great way for real estate investors to save on taxes. The rule allows you to defer capital gains taxes, which can save thousands of dollars.

Work with a qualified intermediary who understands the complexities and rules to make the transaction work.

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