Everything Investors Need to Know About 1031 Exchanges
Here’s everything you need to know about using a 1031 exchange.
If you’ve been thinking about selling your California investment properties and moving somewhere else, you should be aware of how 1031 exchanges work and what they mean for you. Today we’ll be talking about 1031 exchanges are used, how they work, and what the process of using them looks like.
Essentially, a 1031 deferred exchange allows investors to defer capital gains tax payments when selling an investment property and exchanging into another one. There are a few types available, but most people will sell their property and purchase a similar one. You could sell land and buy a fourplex, or sell a duplex and buy a single-family home. As long as it’s an investment, 1031 exchanges can be done in all 50 states. So, many people are selling California investment properties due to tenant laws and purchasing property in other states.
Investors can also do a simultaneous exchange, which means buying and selling at the same time. There’s also a reverse exchange that involves buying a property first and then selling. There are construction-related exchanges as well.
"As long as it’s an investment, 1031 exchanges can be done in all 50 states."
There are some basic guidelines involved with exchanges. Most importantly, it must be a similar kind of property—in this case, it must be an investment property. There’s also a timeline; the clock starts when your initial property closes, and you have 180 days from then to find the next property to purchase. However, you have 45 days to identify the properties you want to buy. If you’re buying more than three properties, the sum of their purchase cannot be more than 200% of your sold property. So, if you sell a $500,000 property, you can buy 10 properties for $100,000 each.
How the tax deferral works is that you can roll money over from your sale into your new property, but it must have an equal or higher value than the one you sold. If it’s less, though, you’ll have to pay taxes on it. For example, if you sell a property for $300,000 and want to buy another property for $300,000, you could keep $50,000 and only roll $250,000 over. However, you’ll be taxed on the $50,000 instead—essentially, anything you don’t roll over will be taxed.
The IRS doesn’t really have any rules about how long you must own a property before doing a 1031 exchange. However, some advisors recommend holding onto the property for at least a year.
I know this is a lot of information to digest, but we’re happy to answer any questions you may have about 1031 exchanges and how you can use them. We’re here to help you, so feel free to reach out to us with any and all of your real estate investment needs. Until then, we look forward to hearing from you soon.