A 1031 exchange is a real estate investment that Section 1031 of the US Internal Revenue Code allows in order for investors to defer paying capital gains taxes. When you sell a property, those proceeds are usually taxed. But, if you take the money you earn and re-invest it in a similar investment within 180 days, you can defer those taxes.
It’s a great idea for investors who want to sell one income-producing property and buy another.
Let’s take a look at what’s involved in a 1031 exchange.
The Basics of a 1031 Exchange
The 1031 exchange allows Atlanta property owners to defer paying the taxes on any income they earn off the sale of their property by purchasing another like-kind property with the proceeds of that sale.
Here’s an example:
Let’s say you own an investment property that has appreciated quite a bit over time. Maybe you’ve held it for 10 or 20 years. When you sell it, you earn $200,000 on the sale. If you want to avoid paying taxes on that $200,000 of profit, you will need to use those funds to buy another investment property.
The new property you buy has to be similar to the one you sold. That doesn’t mean you have to buy a property that’s exactly the same. You can sell a single-family rental home and buy an apartment building. Or, you can sell a condo unit and buy a single-family home.
The “like/kind” threshold simply means that you have to exchange one income-producing property for another income-producing property. You cannot use the 1031 Exchange to sell your rental units and then buy yourself a new home that you plan to live in yourself.
Timelines and Requirements with a 1031 Exchange
When you sell your original property, you cannot pocket any of the money that you make. It goes into a separate escrow account that’s managed by a qualified intermediary.
After you close on that sale, you have 45 days to identify a like-kind property that you’d like to purchase. You don’t have to buy it yet, and there’s always a chance that your offer won’t even be accepted on the new property. But, you have to at least identify a property within the 45 days.
You need to close on a new property within 180 days of selling the first property. So, your timeline to buy a new property is 180 days; the clock does not restart after the 45-day identification period.
Benefits to Atlanta Investors
The tax deferment benefit is a great reason to use the 1031 Exchange, but there are other advantages as well.
For example, you can leverage the property you already own in order to buy something that’s more valuable. Perhaps you are looking to sell a rental home that’s beginning to need a lot of maintenance. If you have a lot of equity built into that property, you’ll have the opportunity to purchase a property that can earn you more in rental income. By using this exchange, you increase your buying power and your potential for cash flow and long term returns.
If you’d like some additional guidance on the 1031 exchange or you need help deciding whether it will work for you, please contact us at Property Services of Atlanta. We have a lot of experience with this program.