1031 Exchanges Demystified
Let’s talk about the IRC loophole known as the 1031 exchange. First let us discuss what a 1031 exchange can do for you. Is 1031 exchange something you can take advantage of? Here is a breakdown, you can decide for yourself. Let’s explore.
What is a 1031 exchange? 1031 exchange is a section of the IRC. Within the time guidelines among others, a properly structured 1031 Exchange lets investors defer capital gains when reinvesting in a second property after the sale of another.
Let’s wrap our heads around the power of 1031 Exchanges.
An investor has property A for $100,000 in capital gains from the sale, $35,000 in combined taxes, leaving only $65,000 to reinvest.
Let’s assume an average 25% down, and 75% loan to value ratio, the original seller will be limited to buying a new property worth of only $260,000.
Assuming similar ratios, a 1031 Exchange would allow the investor the entire $100,000 to reinvest, resulting in buying potential of $400,000 for property B.
This demonstrates how these 1031 exchanges can protect individuals from capital gains. It would be extremely useful if you had a firm grip of all the terminology used in the 1031 exchange. Use capital gains calculators, which can be found online, and find out what a 1031 exchange can provide you.
Much due diligence is necessary prior to executing an exchange. There are three steps in calculating your capital gains, use a CPA or property tax expert in this area, this part can be tricky, and not where you want to make a mistake. You can also check out the video at https://www.youtube.com/watch?v=np0wAdEFFqY and learn more about 1031 exchange.
Time limits are in play when it comes to 1031 exchanges, know your timetable or it could cost you. Exchangers are limited to 180 calendar days or whenever they file taxes, whichever comes first. A good number of investors choose to do exchanges immediately following tax season, allowing them the maximum time to acquire the second investment property. Look for help in your area from a tax specialist, realtor or financial advisor. Speak with other investors for recommendations of a professional in your area that has experience with 1031 exchange. If you have not executed a 1031 exchange on your own before, we recommend the use of a professional the first time or two. If you plan to sell a property and use that money to reinvest in another investment property, you need to find out if a 1031 exchange is available for your needs. Getting this process right is crucial, don’t rush your learning curve, get help if you need it and use the money saved to buy bigger and better properties.
If you are a property investor, you must take advantage of the 1031 Exchange.
