If you own multiple properties, you may hit a point where you would like to sell one property to raise funds for a different opportunity; yet you’re dreading the tax bill you may face because the first property has appreciated in value. But through a 1031 exchange, you can defer your tax expenses by swapping proceeds from the sale of one investment property directly into another.
But, as with many tax-related strategies, the 1031 exchanges have a lot of fine print and are not right for everyone. Here’s what you need to know.
The 411 on 1031 Exchanges
There are multiple procedures, rules, and regulations that must be followed when executing a 1031 exchange. If your transaction doesn’t fully comply with them, not only will you lose your favorable tax status, but you could also incur penalties as well.
You have to follow IRS rules closely in order for a 1031 exchange to be valid. A real estate owner must identify in writing or close on a transfer property within 45 days of the sale of the original property. Then the owner must close on the new replacement property within 180 days after finding the replacement property was selected. The real estate investor cannot take possession of the funds from the sale of the first property, which means a qualified intermediary acts as a substitute seller of the first property, acquires the new property at closing, and then transfers that second property to the real estate investor.
1031 exchanges can also be an estate planning tool to limit the tax bill your heirs may face. If, when you pass away, you leave property to your heirs that you acquired through a 1031 exchange, the value of that property will be set at the fair market value for the property, eliminating the need to pay taxes on any appreciation of that asset, or the properties held in previous 1031 exchanges.
Making Wise Real Estate Decisions
While 1031 exchanges provide a great benefit, they are not easy to execute properly. It requires extreme attention to detail and timeliness to execute a successful 1031 exchange. If you don’t have the time to watch the calendar or would rather focus on property than IRS regulations, it’s best to work with an experienced professional. We can help guide you through your real estate transactions and help you consider how real estate investment can fit with your overall portfolio and goals. Call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call!
About 1on1 Financial
1on1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1997, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.