The real estate market is rather unforgiving, but you may not even need extra cash to keep playing it. The interesting world of 1031 exchanges may appeal to real estate investors looking to increase their chances of profit.
What is a 1031 exchange?
This transaction, sometimes called a like-kind exchange, is a way to defer taxes while acquiring a property. The tax code allows sellers to avoid capital gains tax when transferring a property to a new owner. This works only if the gains are used to purchase a similar, or “like-kind,” property.
Why would someone do this?
Real estate investors use this allowance to change their investment property without losing the gains of the last one. This might be a smart idea if one property’s likelihood to increase in value has soured compared to a new potential property.
What makes a property a like-kind to the one I’m selling?
The legal definition of like-kind is broad, dictating simply that the characteristics or nature of a property must be the same as another, although the value or quality does not need to be the same. This prevents nonreal-estate assets from being exchanged, but a house could be exchanged for an apartment building or a commercial property.
Can I exchange my primary residence?
No. 1031 exchanges are limited to investments properties or commercial space.
Do I need a lawyer for a 1031 exchange?
A lawyer is generally recommended for any real estate transaction. An attorney can work with buyers to ensure the exchange is equitable for both parties and official in the eyes of Florida law.