The Shopper Real Estate: Understanding the 1031 Tax-Free Exchange
By Jess Barron, Lindsey’s Inc. Realtors
You probably have heard of tax-free exchanges or maybe you have completed one yourself. If you are a real estate investor and you are not using 1031 Tax-free exchanges, you certainly should be. With a 1031 exchange, you are able to defer paying taxes on the sale of a property. If you reinvest the proceeds in a new property, this is considered an “exchange” rather than a sale. This will allow you to avoid a large capital gains tax.
The legislation and “rules” for tax-free exchanges are constantly changing so it is important to stay up to date with the latest changes.
As it stands now, both properties involved must be investment properties, whether you intend to lease the new property or flip the home for profit. For example, you cannot sell an investment home, then put the profit into a property that you intend to live in yourself, and avoid taxes. Also, the home or property you are buying must be equal to or worth more than the property you just sold.
There are several rules to follow when completing a 1031 exchange. As you might expect with government and taxes, it is a complicated process. Once you decide to do a tax-free exchange, the proceeds from the sale of the first property will be held in an escrow account by an independent third party. You cannot access this money until you close on a new property. Forty-five days is the amount of time you have to identify a new property, once the first home closes. Once you find the property, you have another 180 days to complete the purchase.
Real Estate transactions are fluid and often complicated. Properties do not always close on time, or sometimes, close at all. Due to this unpredictability, many investors choose more than one property to buy to hedge themselves should one not close. There are several rules involved with this and I will not bore you with the details. More information can be found on IRS.gov and Realtor.com.
With the local real estate market growing stronger and stronger by the day, it might be a good time for you to invest. I hope this article will provide you with the ability to save some money. If you are already investing, I hope this article will improve your bottom line.
Jess Barron is an Associate Broker with Lindseys, Inc. Realtors and President-Elect of the Newnan-Coweta Board of Realtors.