Real Estate and the Internal Revenue Service: 10 FAQs and Facts About 1031 Exchanges

A 1031 exchange is a vehicle you can use to swap one type of investment property for another. Doing this allows you to limit the amount of tax you have to pay when you make the exchange. Exchanging the type of investment you have through a 1031 exchange allows you to grow your investment without claiming a capital gain or cashing out your investment.

By rolling the investment over from one real estate property to another, you can profit on your investment and not pay tax on the investments until you cash out, often many years later. When you cash out, you will only need to pay one tax, and that is the long-term capital gain rate. While there are many benefits to a 1031 exchange, it is important that you understand how they work to save yourself headaches at tax time.

Understand Depreciation Recapture

If you exchange depreciable property within a 1031 exchange, you may trigger a “depreciation recapture.” This is taxed as ordinary income. Depreciation recapture most often occurs when you exchange a building for unimproved land. If you do this, the depreciation claimed on the building will be considered ordinary income.

You Cannot Use One for Personal Use

These exchanges are meant for use for business and investment properties, not personal homes. There are some ways you can use these exchanges for vacation homes, but these rules have been tightened up significantly in recent years.

Personal Property Cannot Be Used

In the past, it was possible to use personal property, such as aircraft and franchise licenses, as part of a 1031 exchange. New rules set into place at the end of 2017 mean that only real estate can be used.

“Like-Kind” Doesn’t Mean What You Think

These types of investments require a like-kind exchange, but that doesn’t mean that what you are exchanging must be the equivalent to what you own. You can exchange raw land for a strip mall, or one business for another. 1031 exchanges offer a variety of options for investors.

The Exchange Doesn’t Have To Be a Simple Swap

In fact, it most likely will not be. The exchange typically goes through a delayed, third-party exchange, known as a Starker exchange. In this case, you can get rid of your property and an intermediary holds the funds for you. They will then use the funds to purchase the replacement property when you find something you want. You cannot receive any of the funds from the sale of your property. Doing so will break the 1031 exchange.

You Have To Select a Replacement Property

Even though an intermediary will be holding the funds from the sale of your property, you don’t have an unlimited amount of time to determine what to do with them. Within 45 days you must designate the property you want the intermediary to acquire for you. You can select more than one if there are several available, but you must close on one of the designated properties to maintain the 1031 exchange.

You Have a Limited Closing Window

You must close on the new property within 180 days of the sale of your old property to maintain the 1031 exchange. It is important to note that the clock starts ticking on this transaction when you close on your old property, not when you give the intermediary directions on which investments you would like to purchase. This can create a relatively tight time frame if you have not been actively looking for investment.

Any Remaining Cash is Taxed

If you have leftover cash after purchasing the replacement property, it will be taxed. It is considered sales proceeds and generally taxed at the capital gain rate. The taxable capital gains rate you are required to pay depends on your own situation but is generally 15 or 20 percent.

Assets That Aren’t Cash Are Still Assets

Even if you don’t receive any cash after the sale of your property and the purchase of a new property, you may still end up with taxable income. If your mortgage goes down, the difference is considered profit, and you will owe taxes on it. It is important to understand all of the numbers, both on the sale and purchase of your investments, before signing any papers.

Vacation Homes are Complicated

There are a variety of rules that make using a 1031 exchange for vacation homes tricky. The rules were set in place to prevent people from taking advantage of converting their vacation homes to personal homes and delaying capital gains. You can use a 1031 exchange for a vacation property, but there are several steps you need to implement to ensure you are following the rules. If you are holding the home as a rental, it needs to actually be rented. Ideally, it will be occupied by renters for at least one year. It is not enough to be occupied occasionally by you or family and friends.

The IRS uses a safe harbor rule. To prevent them from challenging whether a home qualifies as investment property as part of a 1031 exchange they require that the home be rented to another person for fair rental rates for 14 days or more and that your own use of the home cannot exceed 14 days or 10 percent of the number of days during the 12 month period the unit is rented. These rules must be met for the two years after the exchange.

Ask About the Transition Rule

A 1031 exchange allows the exchange of qualified personal property in 2018 if the original property was sold or the replacement property purchased by the end of the year in 2017. This does not apply when a new property is purchased before the old property is sold.

As you can see, there are many rules set in place when using a 1031 exchange. These rules were developed to simplify and clarify ways you can protect income during investment. While a 1031 exchange may seem complicated, it is actually a very well-defined way to manage investments, allowing you to continue to build your assets without losing profits to capital gains.

Tips You Need For Selling Your Home

Selling your home is a mixture of excitement and dread. If you’ve been through it before, you’ll know it’s quite a stressful process, and if it’s your first time, well it can all seem a little daunting. But have no fear, whether this is your first time or you’ve done it before, here are some handy tips you’ll need for selling your home.

Consider Renting It

Before selling your property, you could be in the position where instead of selling you could rent the property. With companies like Bigos Property Management, there might be more benefits to renting it for a while if the current property market isn’t working in your favour.

Set The Right Price

It’s important that you get a number of realtors or estate agents to come and view the property and give you a quote. This is important because with a number of quotes, you can set a price around the average and this will likely quicken the selling process. Setting your property’s price too high will detract buyers from even visiting the property so don’t be too greedy when it comes to setting the price.

Present Your Home Well

From the moment the estate agent comes into take photos to the various potential buyers who come to view the property, your home should look it’s best. That’s why it’s good to touch up any problems with the home, declutter it and present it in a way that’s attractive and that will help buyers visualise themselves living there. Walking into a cluttered, unkempt room will have the opposite effect. Don’t forget your outdoor space too, as this will be the first thing buyers see.

Remove Pets And Yourself For Viewings

Household pets may be good with you, but you don’t know if the buyers who puts an offer, could be allergic to cats or have a fear of dogs. That’s why it’s important to remove both the pets and yourself from the property when it’s being viewed. It also gives buyers the chance to look round without feeling that they’re invading your space or pressured. Instead, they can take their time with it. So go out for a walk, take the pets and let your buyers enjoy the viewing process.

Share Your (Positive) Views On The Neighbourhood

Buyers might be coming from far and wide and one of the selling points for a buyer maybe the surrounding area. That’s why it’s useful to chat with the buyers or give your estate agent, personal recommendations on the neighbourhood. Sure the estate agent will know a few things but probably not as much as you’d know. Stick to the positives as you don’t want anything negative affecting the chances of them not signing on the dotted line.

Selling a home does have its ups and downs, but it’s great when your home finally sells so that you can start your new adventure in another property. Make sure you cover all these tips when you come to sell your home.

Buying A House: The Process

Needless to say, buying a property is an exciting period in anybody’s life. If you are currently at this stage, you will have a lot to think about, and if you have never bought a property before you may be a bit confused and overwhelmed by the whole process. But don’t panic, as we have put together this easy guide with all of the most important details you need to know about.

First things first, you, of course, need to get your finances in order. Read up on when to open a new credit card account, what your credit score should be, how much money you need, whether you can secure a mortgage and so on.

Now, begin the house hunting process. You will no doubt have a list of requirements regarding what you want from your property, but it also imperative to ensure you choose a company with care. For instance, if you are interested in heritage developments, you will need a heritage developer specifically, and you will need to look for a company with a considerable amount of experience and a good reputation in the industry.

Of course, you will need to go on a few viewings, and if you are opting for a new development or any renovations, you will need to view the drawings. If you find something you have fallen in love with, you will need to reserve the property, which will require a fee. More often than not, this fee will be part of your deposit, and, therefore, when it comes to paying the deposit it will be deducted from the full amount.

After this, the process of completing everything will begin, and you are advised to seek legal assistance so that everything is handled above board. If you use the services of a solicitor, they will make sure you understand everything that is involved in the process, and they will also ensure the transition is a smooth one without any complexities are issues.

Your legal advisor will also be able to give you advice so you can get the most from the move. They will draw up the contracts for exchange too. You may also need help with funding, such as a mortgage, and this will be handled during this stage as well. Once your reservation has been approved, you will then need to apply for a mortgage or any loans, if necessary, as you will need approval before you can continue with the process.

After this, you’re almost at the finishing line. The contracts need to be exchanged, and this is when your deposit will be required. After this has been done, the moving dates will be arranged, and you will then need to sort out everything else that comes with moving into a new property, such as the services of a removal company and alike. It is vital to factor in the cost of removal services and legal advice when budgeting for your entire move.

Hopefully, you now have a better understanding of the general process that is entailed when moving to a new property. This doesn’t have to be a complex procedure, so long as you handle everything correctly and have quality legal assistance.