In a booming economy, investors are often looking for ways to save money while participating in active investing. Real estate is considered a good solid and safe place to invest money over the long haul.
Many savvy investors are also taking advantage of 1031 exchange rules so they can reap the tax benefits and keep growing their wealth through real estate.
1031 exchange properties are a way to save investors from being hit too soon with capital gains taxes and it benefits the market as investors continue to put money back into real estate as they make a sale.
Are you ready to learn more about 1031 exchange real estate? Read on to learn 5 things you should know about participating in a 1031 exchange.
1. What Is a 1031 Exchange?
A 1031 exchange is a set of rules put forth by the IRS that allows an investor to sell one property and then reinvest in another property so they can avoid paying, at least temporarily, paying the capital gains taxes and depreciation recapture tax on the sold or relinquished property.
So, a real estate investor can opt to sell a property. Then in an effort to avoid paying the capital gains if the property has increased in value, they can reinvest in a new property.
2. What Does Like-Kind Mean in 1031 Exchange?
One of the important rules to understand about a 1031 exchange is the term like-kind. It used to be you could participate in 1031 exchanges with all sorts of valuables. Now the IRS has tightened the rules to include only property and real estate.
Like-kind is a liberal term referring to exchanging one type of real estate for another, like-kind. Although the rules are pretty open so you could sell an apartment building and buy commercial land as the exchange property.
3. What's the Role of a Qualified Intermediary?
A qualified intermediary is an important part of the 1031 exchange. In fact, if you're not careful to identify the qualified intermediary before you even begin the 1031 exchange process, it's considered void, losing you the benefits.
A qualified intermediary is responsible for holding the funds from the relinquished property until you invest it into the new property. If you don't put the funds with a qualified intermediary, the IRS just considers you doing two transactions and you lose the benefits.
4. What Are the Most Important Exchange Rules to Follow?
There are many rules to follow and they are strict, so you want to make sure you're going through a 1031 exchange with an expert to guide you.
Having said that, there are some timelines that are critical to follow.
The replacement property that's being bought with the funds from the relinquished property needs to be of equal or greater value. The replacement property has to be identified, not bought and closed on, within 45 days. Finally, within 180 days, the replacement property needs to be purchased.
5. What Are the Benefits of a 1031 Exchange?
A 1031 exchange offers some real financial benefits for investors. It allows the investor to avoid paying capital gains taxes and depreciation recapture tax on the sold or relinquished property.
In essence, the 1031 exchange acts as a tax shield to save money.
Understand the Rules of 1031 Exchange Properties
1031 exchange properties allow investors to protect their money while continuing to grow it at the same time. If you want to invest in a better property, you can do it using assets from the one you've already sold.
If you need help managing your investment properties, we can help. Contact us today to learn about our property management services for your investment properties