1031 Exchange: Everything You Need to Know

1031 exchange

Did you know that 90% of the world’s millionaires became wealthy due to real estate? Whether you’re currently using the 1031 exchange or not, participation has various benefits. 

You might wonder what those benefits are and how lucrative they are for those in real estate investing. While it might feel like a challenge to figure out if it’s right for you, it doesn’t have to be! Read this guide on everything you need to know about the 1031 exchange today. 

What Is the 1031 Exchange?

The 1031 exchange allows you to buy and sell real estate without paying capital gains taxes. Sell real estate and buy another similar investment without paying taxes on the profits from the sale. The 1031 exchange has allowed tax attorneys and investors to see if they’ll qualify for various properties. 

A 1031 Exchange Guide

To sell a property and use the exchange, you’ll need to have a qualified intermediary, such as an entity, company, or person. The intermediary will receive the proceeds of the sale from the first property. 

Hot markets can make timelines difficult. However, you can do another 1031 exchange once you sell the property. 

There’s no limit to the number of exchanges you can do when you sell and buy real estate. Your heirs can sell the real estate and keep the cash without large tax consequences. You need to designate the replacement property within 45 days and close escrow within 180 days of selling the first property. 

Is the 1031 Exchange Worth It?

Since there are many requirements, it’s not as flexible as the traditional buying and selling process. So first, think about the type of property that’ll work with the exchange. 

Next, choose the qualified intermediary. The only time it isn’t required is when the properties are bought and sold on the same day. Doing this can be risky and rare, especially if you don’t have experience with it. 

Contact the IRS

Once the process is complete, it’s time to contact the IRS. You can file Form 8824 with your taxes for when the exchange occurs. 

Speak with your tax advisor to ensure it’s filled out correctly. If the IRS doesn’t think you filled it out correctly, you could need to pay a large tax penalty. 

Ensure that each property is similar to avoid extra penalties. For example, if you buy a property of a lesser value, the reduced debt is taxable. 

Structured Transactions 

There are a few different ways to structure the transactions. First, there’s the delayed build-to-suit exchange, where the proceeds to finance the new property meet the needs of the investor. 

The delayed reverse exchange is when the replacement property is bought before you sell the original. A simultaneous exchange is when both transactions occur at the same time. A delayed exchange is when one property is being sold while the other is bought within 180 days. 

A Guide to the 1031 Exchange

This 1031 exchange guide provides an explanation of what it is. It also shows how beneficial it is. 

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