When it comes to the real estate industry, many business owners, realtors, title companies, and property investors might have encountered the term 1031 Exchange. This regulation is arguably one of the hottest topics in the world of real estate, as far as tax liabilities for property sales are concerned. It’s important to understand its mechanics and how it can be applied in your property investment situation.
In this article, we’ll cover key points you need to know about the 1031 Exchange process. Keep on reading as well to understand what it takes to purchase more than one property and what terms apply.
1031 Exchange in a nutshell
The Internal Revenue Code Section 1031 states that investors are given the opportunity to defer all taxable liabilities associated with the sale of real estate property. They are allowed to do so, provided that they buy another investment property within a specified period and meet federally regulated guidelines. In short, this type of transaction enables you to swap one investment property to another without being taxed for the capital gains on a property sale.
Primary requirements of 1031 Exchange
It’s essential to know the main requirements of the 1031 Exchange. These requirements include the following:
- 180-day time limit: The 180-day time limit is based on the due date of the current year tax return. The regulation requires that you must own the new property within 180 days of the sale of your old property.
- 45-day time limit: The owner must identify the new property to be purchased within 45 days of closing the sale for the old property. You must then use the 1031 document and sign it as a written document showing the property to be purchased. This document must be provided to either the seller of the property or a Qualified Intermediary.
- Qualified Intermediary: There is a need to use a Qualified Intermediary to hold profits from the sale. In most cases, some companies are exclusively set up to serve as a qualified intermediary. The 1031 Exchange, however, specifically identifies disqualified persons who may not serve as a qualified intermediary as “agents of the taxpayer at the time of the transaction.” These include a person who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker. Ultimately, it may be better to use a company that exclusively deals with the 1031 Exchange as your qualified intermediary.
Buying more than one property
Another vital question arising from the 1031 Exchange is: “What if a buyer plans to buy more than one property?” As per the Treasury Regulations, investors are allowed to purchase the following:
- Three properties without regard to the fair market values of the properties.
- Any number of properties as long as the total value of the new properties acquired should not be more than 200 percent of the value of the sold properties as part of the 1031 Exchange.
At this point, you now know how valuable a 1031 Exchange has the potential to be an investment tool. It allows you to trade up real estate without fear of paying capital gains taxes. We hope this article has shed some light on what you need to know about this regulation and how beneficial it may be for you as an investor of real estate properties.
We provide comprehensive investment management and financial planning services to high net-worth individuals and family estates in San Antonio. If you’re looking to learn more about 1031 exchanges, get in touch with us today to see how we can help!