I get a lot of questions about 1031 exchanges. People ask what they are and how to make them work. I have sold real estate for 20 years, and I have always helped investors buy and sell rentals. I’ve done a lot of 1031 exchanges, and they can benefit you if the situation is right.
What is a 1031 Exchange?
The 1031 Exchange is also known as a Starker Exchange. It’s a strategy for rental property owners to make a tax deferred property exchange. You’re selling one property and getting another property or multiple properties. There are several requirements involved in this type of transaction. Instead of paying a capital gains tax now, you can invest the proceeds from one property by purchasing another and deferring the tax.
1031 Exchange Requirements
You are required to exchange like/kind properties. This can be done in all states; but you do have to buy the property within the United States. Here’s an example. If you sell a property in Virginia for $1 million, and your loan is for $500,000, you have to purchase real estate that’s equal to $1 million, and you must have a loan of at least $500,000. It can be one property or spread out over two or three properties. The value simply has to meet the requirement.
1031 Time Requirements
You need to identify up to three properties to buy within 45 days from the time that the property you currently own closes. So, if you close on March 31, you have 45 days from that time to identify three properties. It can be sooner, but that’s the deadline. Then, you have to close on the new property within 180 days after closing on your first property.
Choose your next investment property wisely. If you’re coming from a market with a lot of appreciation and you have equity, it’s great to diversify and put the money into properties in up and coming markets. Take advantage of the growth. Lots of areas can offer great investment opportunities.
If you have any questions about the 1031 exchange, or anything pertaining to Northern Virginia property management, please contact us at Richey Property Management. We have some great information we can share with you.