Frequently Asked Questions About 1031 Exchange

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What To Know About a 1031 Exchange

You might have heard about 1031 exchange, and it may be something that you are interested in doing. You do well to get a little bit of information before you actually go ahead with the 1031 exchange process. A 1031 exchange is a way for investors to legally defer their capital gains taxes when they sell real estate property.

This is only true when the real estate property was held for investment or business purposes. In order to successfully go through this process, you do well to follow the specific rules and regulations for a 1031 exchange. In this way, you will make sure that it is possible for all of your profits to continue to work for you when you make the purchase of your subsequent investment property. The government is always looking for their part when you make a business property sale, so you do well to understand the following frequently asked questions.

#1 Are Taxes Applicable in a Non-1031 Exchange?

Yes. Taxes can be deferred when you do a 1031 exchange. These taxes include capital gain taxes and depreciation recapture taxes. Federal capital gain taxes are taxed at 15%-20% of the increased value of the property, and state capital gains can be between 0% to 13.3% of the increased value of the property. A Depreciation recapture tax is 25% of the amount that you have depreciated over the years. Other property sales tax can include a Medicare surtax of 3.8%. In order to defer these taxes, a 1031 exchange process has to occur.

#2 What Is a Qualified Intermediary?

While carrying out a 1031 exchange, it is more complex than just reinvesting into another property. You are going to have to transfer the property to an intermediary. You must get in contact with a qualified intermediary who is assigned so that when the property closes, this qualified intermediary will receive the transferred funds into your account. Know your options as to where to go to find this professional.

#3 What Type of Purchases Can You Make?

For 1031 exchange, you must invest all the gains from your sale into a property of like kind. This means that if you sold a business or investment property, then you have to purchase the same type of property. You have to maintain the character of your investment in order for the 1031 exchange to work for you. For instance, if you purchased a DST, then you could sell that same property and purchase a rental home.

#4 What Should I Know About Deadlines?

It is crucial to understand the fact that a 1031 exchange is subject to strict deadlines. You cannot just take all the time that you want to reinvest in your next property. If you were to sell a property tomorrow, it is expected that you would have identified your next replacement property within 45 days of the sale. After that, the process of reinvestment has to take place within the next 180 days. The best thing to do is already have the reinvestment property in mind when you sell so that you can make the next purchase as soon as possible.

#5 Do I Have Multiple Options?

You do have a few options when it comes to carrying out 1031 exchanges. You are able to purchase a different type of investment property that you can manage by yourself, you can purchase a property that is a triple net lease, and a national tenant can take the lease of the property. This typically is a tenant who has leased for more than 10 years. Finally, if you want to avoid active management of a property and you want to diversify your investments into various properties, then you may consider a DST 1031 exchange.

Avoid Paying High Taxes and Make Big Purchases

A 1031 exchange is a fabulous option for you if you want to maintain your funds while carrying out a legal property sale. Be sure that you understand the laws and guidelines when it comes to making a legal 1031. This type of transaction can be a fabulous way to make a purchase.


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