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The 1031 Exchange: A Basic Guide for Investment Property Owners
As a real estate investor, you might have come across the 26 U.S. Code § 1031 – “Exchange of Real Property Held for Productive Use or Investment,” or the “1031 Exchange,” for short. If you haven’t heard of this, here’s your introduction.
What to Know about 1031 Exchange Restrictions
The 1031 exchange—also called the “like-kind” exchange—allows investors to “swap” a real estate property for another of equal or greater value. When performed correctly, the process can help investors defer capital gains and depreciation recapture taxes generated by the property’s sale.
How Does a 1031 Exchange Work With Rental Properties?
A 1031 exchange, based on Section 1031 of the Internal Revenue Code, allows property owners to defer capital gains taxes when they sell one investment property and purchase another similar property. This strategy is beneficial for rental property investors seeking to potentially expand their portfolio, increase cash flow, or diversify their investments. Here’s helpful information on how a 1031 exchange works with rental properties.
What Is the Fair Market Value (FMV) in a 1031 Exchange?
Fair Market Value (FMV) is the price a property would sell for in an open and competitive market under normal conditions. It represents the value agreed upon between a willing buyer and a willing seller, with neither party under pressure to complete the transaction.
1031 Exchange 200% Rule: What It Is and How It Works
The 1031 exchange process is intricate, with the IRS setting up many rules to ensure compliance and avoid abuse of the tax deferral benefits. One such rule is the Three Property Rule which states that an investor may identify up to three like-kind properties to exchange. However, there is a way to exchange more than three properties if an investor chooses to do so. This course of action is possible through the 1031 exchange 200% rule. What does this process entail? How do you leverage it? Below, Realized 1031 has shared an article answering these questions to help you better understand how the 200% rule works. Keep reading to learn more.
1031 Exchange Michigan: Rules, Taxes, and Other Considerations
It doesn’t matter whether you’re a wealthy businessman, a humble solopreneur, or a hardworking corporate employee; we all despise the same thing: taxes. Taxes can easily drain your finances, and doing it wrong can exacerbate the depletion of your resources.
1031 Exchange Boot: What It Is, How To Calculate, and Rules To Consider
The main benefit of a 1031 exchange is to defer taxes on capital gains. In theory, you should be able to delay payments on all the proceeds of a real estate asset sale, but there are cases when you may still incur tax liability. One specific scenario is the 1031 exchange boot — money or non-like-kind property you receive during a like-kind swap.
Can You Do a 1031 Exchange Between States?
A frequently asked question connected to the 1031 exchange is, “Can you execute a 1031 exchange between states?” At the federal level, the answer is a definitive “yes.” Internal Revenue Code 26 U.S. Code § 1031 – “Exchange of Real Property Held for Productive Use or Investment” – falls under federal tax legislation. As such, the process is uniformly recognized across all 50 states and DC.
Can You 1031 Exchange a Second Home?
Second homes can be personal or investment property, and sometimes there is a fine line between the two. If you own a second home that you live in part of the year, and you bought it thinking the value would increase, but you don't rent it to others, it's most likely not an investment. If you have a second home in a popular vacation area and rent it to others most of the year, but you consistently spend a week there over the holidays, that is likely an investment property.
Can You 1031 Exchange Into A Property You Already Own?
Generally, a 1031 exchange on a property you already own cannot be done, but with some creativity, there are some ways around it.
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