Investors who are looking for tax-deferral strategies can potentially rely on 1031 Exchanges, allowing them to preserve their equity while also offering the possibility of passive income and enhanced diversification. While 1031 Exchanges apply tax deferrals at both state and federal levels, each state may have its own rules that you must take into account to ensure that your transaction remains compliant.
Are there any Florida 1031 Exchange rules worth knowing about? Yes, and the answer is more complex than it seems, given how the state doesn’t levy income tax. Realized 1031 shares what you need to know in this insightful article.
Florida conforms to the framework created by Section 1031 of the Revenue Code. For investors conducting a successful exchange involving Florida properties, the swap won’t be recognized as an official sale. As such, you defer capital gains taxes until a taxable event occurs. This delay in tax liability helps you preserve more of your capital and enter sectors or asset classes that are more suitable for your long-term financial goals.
However, to successfully execute the exchange and remain eligible for tax-deferral benefits, there are a few requirements you must comply with.
In Florida, there are a large number of secondary or vacation homes leased seasonally or as Airbnbs. There are around 845,000 to a million units, depending on definitions. As such, there’s a high tendency for investors to attempt to exchange these properties for 1031 Exchanges.
Florida doesn’t have specific rules for such asset classes. Instead, we must look at federal rules, particularly Revenue Procedure 2008-16. These provisions create safe harbor requirements that allow Florida vacation homes to qualify as like-kind property instead of personal-use assets.
Once your second or vacation home satisfies these requirements, then it is eligible for 1031 Exchanges.
In the discussion of Florida 1031 compliance guidelines, state-specific rules for the swap are basically nonexistent since there’s no income tax or capital gains tax. Instead, there are a few broader tax rules that will affect the exchange.
Florida imposes a documentary stamp tax for all transfers of real estate, and the payment is due after the sale of the relinquished property and after the acquisition of the replacement asset. Most counties charge $0.70 per $100 in property value. This closing cost must be taken into account before conducting the swap, as the deductions will affect the final sales proceeds and how much you can reinvest.
Each Florida county has distinct and evolving rules for short-term rentals. These can affect compliance with Revenue Procedure 2008-16. As such, it’s important to work with CPAs or financial advisors who are familiar with these ever-changing regulations. That way, you avoid attempting to exchange an asset that doesn’t qualify in the first place.
Exchanging in Florida tends to be much more straightforward since the state doesn’t have income taxes. Federal processes apply, but without the complications added by specific 1031 exchange regulations for Florida. The broader tax rules — such as the documentary stamp tax — are what you need to consider, since these affect reinvestment amounts, amongst other implications. Always make sure to consult with experienced 1031 Exchange advisors or CPAs to confidently navigate these Florida 1031 compliance guidelines.