A 1031 exchange is a popular real estate investment transaction. This type of transaction allows you to defer capital gains taxes when selling an investment property. It’s an incredibly useful tool for real estate investors, but it can be confusing to understand.
Check out the steps below on how to best utilize a 1031 exchange:
1. Decide if a 1031 exchange is right for you. This type of transaction is only available for investment properties, so you won’t be able to use it for your primary residence. You must also use the proceeds from the sale of the property to purchase a “like-kind” property within 180 days.
2. Find a qualified intermediary (QI) to facilitate the transaction. The QI’s job is to hold the proceeds from the sale of your property until you purchase a replacement property.
3. Identify a replacement property. You must identify the property within 45 days of the sale of your original property. You can identify up to three properties, or you can identify an unlimited number of properties if their combined value is equal to or less than the value of the property you sold.
4. Complete the exchange within 180 days. You’ll also need to file a form with the IRS to report the exchange.
By utilizing a 1031 exchange, you can defer capital gains taxes on the sale of an investment property. However, it’s important to understand the rules and regulations associated with this type of transaction to take full advantage of the benefits.
Interested in pursuing a 1031 exchange? Our brokers would be happy to help!