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Sophisticated Buyers Benefit from a 1031 Exchange

When you're buying and selling real estate, certain capital gains rules may apply, particularly if the equity in your home amounts to more than $250,000 on a single family residence or more than $500,000 for a couple. But a Tax Deferred Exchange, also known as a 1031 Exchange, could be the way to go for real estate investors who are concerned with the tax consequences of profiting from real estate.

The first thing you need to do is consult with a professional who specializes in 1031 Exchange rules. Any mistake in the exchange could result in taxable gains that reduce your buying power and impact your bottom line. Basic rules apply:

1. Property involved in a 1031 Exchange must be "like property," and all gains realized from the sale of a property must be rolled into new property of a higher value within a specified window of time (180 days).

2. It is best to secure a sale for the property you plan to exchange first, then you can identify the property or properties you wish to buy with the proceeds. If you sell one investment property for $1 million, you must purchase a new one for more than the gains you received to avoid tax consequences. It is possible to purchase more than one property with the proceeds, as long as the properties are "like kind" to meet IRS requirements.

3. When exchanging one investment property for another, be careful not to convert that property to a primary residence before a one year holding period has expired. Doing so could result in severe tax consequences.

4. Be sure to understand what sorts of fees and expenses involved in the exchange require additional monies to be brought to the closing table. The IRS rules are specific, and an expert can help you understand the requirements.

For more information on 1031 Exchanges, contact us for a list of our 1031 consultants.

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Sophisticated Buyers Benefit from a 1031 Exchange