A 1031 Exchange refers to the exchange of certain types of property of like-kind in an effort to defer recognition of federal income tax liability and capital gains. Specifically, it allows you to avoid paying capital gains once you sell a property, but only if you reinvest the proceeds from that sale into another property within a timely matter. At NextHome Titletown, we have worked with a number of sellers who are “1031-ing a property,” and seeking a like-kind exchange.
Like all real estate transactions, a 1031 Exchange is not without its stipulations. NextHome Titletown serves sellers in the Greater Boston area who want to 1031 Exchange properties.
Using a Qualified Intermediary
The first step in this exchange is finding a qualified intermediary. An intermediary is a company (or in some cases, an individual….who is not your attorney) that facilitates this exchange by holding the funds of a property sale until they can be transferred to the seller of your second investment property. So, instead of the funds of the sale from your first property going directly to the seller, the proceeds will go to the intermediary who will then transfer the money to the replacement property seller. This action defers the taxes that are typically issued during real estate transactions under Section 1031 of the U.S. Internal Revenue Code.
1031 Exchange Rules
The stipulations associated with this process defined by the 1031 tax-deferred exchanges are put in place so that you are receiving the full benefits of your real estate investments. But make sure you understand the basic rules for the 1031 Exchange:
You need a like-kind property. This means that the purchase price and new loan of your new replacement investment should be of equal or greater value to the original property. However, there is a broad range of exchangeable real estate investments. For example, real estate land can be exchanged for a commercial building.
There is a timeline. The clock is ticking! You have to identify your second property investment within 45 days of the sale of your initial asset. The entire exchange then must be completed within 180 days.
Why You Should Consider a 1031 Exchange
The key concept of this type of exchange is to help real estate investors advance their gains on the sale of a property and defer taxes. Instead of selling a property, paying the capital gains taxes on that sale, and then buying another property, a 1031 Exchange will defer your taxes, allowing you to save money and give you more buying power when searching for a new property. You might want to proceed with a 1031 Exchange if:
- You have identified a second property that has better potential return on investment.
- You have found a managed property so that you don’t have to manage it yourself.
- You are considering the consolidation of your properties.
- You are thinking about splitting up one property to form several assets.
For a more thorough conversation about for to 1031 Exchange your property, contact NextHome Titletown today, and we will be happy to help you consider all options. Please reach out and say hello at 617.657.9811 or firstname.lastname@example.org.