You may have heard the phrase “1031 Exchange” before and not known what it means, don’t worry, because we’ve created a guide for you that will make understanding this program easy.
What is a 1031 Exchange?
A program offered by the Internal Revenue Service (IRS) that allows an owner of an Investment property to sell their current property and purchase another investment property without having to pay capital gains on the sale of their current property. This tax deferment program allows an owner to bridge the gap between their real estate investments and lifestyle objectives.
Benefits of a 1031 Exchange:
(1) Build your own personal wealth- By reinvesting in a property that is of equal or greater value than the home you sold, you defer your capital gains tax to the IRS and instead build your own wealth through equity in home.
(2) Maximize Cash Flow – utilizing the funds that would have been paid to IRS, you have a greater down payment on purchase, less of a loan that you are paying interest on, and more cash in pocket from rental income.
(3) Step Up in Basis – one of the biggest benefits is the step up in basis upon the death of an owner, which is the IRS elimination of capital gains, recapture depreciation and net investment income tax upon the death of an owner.
How does a 1031 Exchange work?
Although it may seem complicated, we’re here to guide you all the way through the process, the steps are simple:
(1) List property that you want to do the 1031 exchange on for sale
(2) Meet with a Qualified Intermediary who holds proceeds from sale until a new purchase is made.
(3) Identify up to 3 replacement properties within 45 days after the sale of your property that you want to reinvest your proceeds in to that are of equal or greater value than the property you sold. We’ll go more in to detail on what the guidelines are for replacement property.
(4) Close escrow on your replacement property within 180 days from the close of escrow on your subject property.
(5) Notify your tax advisor that you have completed a 1031 Exchange during that year so they can complete necessary documents for tax deferment.
Although the process can seem overwhelming by working with an experienced team you can take your underwater property or one in need of renovations and turn it into a cash flowing investment to build a more equitable future
Contact the real estate agency san diego trusts.