The Traditional Way
The Smart Way - 1031 Exchange
A 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. Using a 1031 exchange, you can reinvest all proceeds from the sale of your investment property and defer paying all those taxes. If you sell your investment property without completing a 1031 exchange, your taxes could exceed 20-35% of the capital gain.
In a 1031 exchange, the replacement property must be like-kind to the relinquished property. The good news is that, in general, any real estate held for investment or business purposes in the US is considered like-kind; the difference in type, grade, or quality doesn’t matter. For example, you can exchange your multifamily rental property for a larger apartment building, or exchange it into a commercial property instead.
The two major exceptions in a 1031 exchange are your personal residence and vacation home. These aren’t considered to be of like-kind to any real estate held for investment or business purposes and therefore, cannot be used in a 1031 exchange.
To avoid paying any capital gains taxes, you need to reinvest all of the proceeds from the sale of your investment property. In other words, the value of the replacement property must be equal to or greater than the value of the relinquished property in order to defer paying any capital gains taxes.
The ownership entity on title for the replacement property must be identical to ownership entity on title for the relinquished property.
If you have made the decision to sell your property the 1031 Exchange option can be a great way to keep your capital invested as you purchase your new property.
Now its time to list or prepare your property for sale.
There are a few rules to be aware of when considering a 1031 Exchange.
You can identify up to three replacement properties and complete your exchange by purchasing one or all of them, regardless of their total value.
You can identify more than three replacement properties and purchase as many of them as you’d like, so long as their total value doesn’t exceed 200% of the value of your relinquished property.
If neither of the other two rules fit your needs, you can also identify any number of replacement properties regardless of their total value, as long as you purchase 95% of the total value of all the properties identified.
From the day you close escrow on the sale of your investment property with Lyon Stahl, you start the clock on your 1031 exchange timeline. You now have 45 calendar days to identify a possible replacement property and 180 calendar days to close escrow on it. Make sure you don’t miss these deadlines, because the IRS is very strict.
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