Investors are always looking for ways to build better strategies. A popular tax-deferring provision might be the ticket. Commercial property owners especially benefit from the advantages. While this transaction is common, there is a lot to learn about how the process works.
A 1031 exchange allows real estate owners to swap one investment property for another. Most real estate sales are taxable. However, through a 1031 exchange, you pay little to no taxes. In this case, your investment continues to grow without taxes cutting in the profits.
It’s important to know a few things about the real estate exchange before continuing, which includes:
- It isn’t personal. The 1031 exchange is meant for investment and business property. Therefore, homeowners cannot use the provision to swap their home for another. In some unique cases, it could apply to vacation homes or other types of property.
- There’s a three-party exchange. Due to the nature of the swap, you can do a delayed exchange. The odds of finding a person with the exact property you want, while wanting yours, can take some time. During a delayed exchange, a middleman holds onto the cash after you sell your property. When the time is right, this person uses the cash to buy the replacement property.
- You need to follow a timeline. After you have sold your property, you have six months to close on the replacement property. The countdown starts immediately after you close on selling your first property.
- You need a Qualified Intermediary. Doing a 1031 exchange by yourself, only using a CPA, could get you into trouble with the IRS. Instead, find an attorney who can legally act as a Qualified Intermediary (QI). A QI plays an essential role in ensuring the exchange transaction is done properly.
There is no limit to how many times you can do a 1031 exchange. You won’t need to pay tax unless you eventually sell for cash.