Utilizing a 1031 exchange is a way to retain some portion of the money you have earned on an investment property. A 1031 exchange allows you to carry over capital gains from the sale of your investment property and reinvest it into a like-kind real estate opportunity, allowing you to keep more of your funds working to grow your portfolio.
While a 1031 exchange can be a useful wealth management strategy, failure to adhere to IRS specifications can disqualify your exchange and result in a burdensome tax liability. The best course of action when considering a 1031 is to work with a professional to help ensure that the transaction is successful.
What Is a 1031 Exchange?
A 1031 exchange, also called a like-kind exchange, is a type of tax filing that allows real estate investors to suspend capital gains taxes when selling an investment property. As part of a 1031 exchange, the investor must put the proceeds from the sale into like-kind investment property of greater or equal value.
According to section 1031 of the Internal Revenue Code (IRC), for a property to qualify for a 1031 exchange, it must be real property used as an investment, business, or trade.
The goal of a 1031 exchange is that it allows you to attempt to grow your wealth as a tax-deferred asset. The IRS puts no limit on how many exchanges you can file, so ideally, you will be able to make several investments to seek to grow your wealth. When you are ready to make a final sale, you will pay one capital gains tax rather than pay on each sale of investment properties during your lifetime.
When to Consider a 1031 Exchange
Several factors determine when a 1031 exchange might be right for you. In our experience, investors who are ready to take advantage of a like-kind exchange are generally:
- Preparing to sell an investment property
- Able and willing to reinvest the proceeds from the sale into like-kind property
- Interested in a long-term, sophisticated wealth management strategy
If you agree with these statements, it is appropriate to consider utilizing a 1031 exchange to help build your asset portfolio.
Should You Hire an Attorney for a 1031 Exchange?
As a responsible investor, you understand the importance of meeting the IRS reporting requirements to avoid tax penalties later.
1031 exchanges are heavily regulated, and those who take advantage of their benefits must meet the exact requirements laid out by the IRS to qualify. Working with a tax attorney specializing in like-kind exchanges ensures that you don’t lose out on the benefits of a 1031 and don’t end up with an unexpected tax burden.
A tax attorney can verify that you choose the right like-kind property and address complex situations, such as a depreciable property exchange, a delayed exchange, or an exchange in which you hold debt on the property you are selling or buying. However, using a tax attorney is not required to execute on a 1031 exchange.
Explore Your Options for Wealth Management
A 1031 exchange can be an essential element of your wealth management strategy. When used correctly, like-kind exchanges are designed to allow you to keep more of the wealth you’ve earned from investment properties working for you.
If you are considering selling an investment property, consult with a professional on the tax benefits of using a 1031 exchange.
