A 1031 exchange is a powerful real estate tool that allows an investor to sell their property and reinvest the proceeds while deferring capital gains tax. 1031 is a section of our tax code that applies to investment properties only, primary residences excluded. There are several different companies that will facilitate a 1031 exchange, my personal favorite being IPX because of their great communication and willingness to walk clients through the process step by step.
Each 1031 exchange comes with a setup fee, typically around $850.
Their are several different requirements in order to complete a 1031 exchange, including:
- Exchange property needs to be a rental for about 18m-2 yrs before you can sell as an investment property using a 1031 exchange.
- 'Flips' are not considered investment real estate.
- Subdivided properties can be sold using a 1031 exchange before properties are divided.
- You have 45 days to identify purchase properties and 180 days to close escrow. The 45 day clock starts on the closing day of the sold property.
- If you're selling multiple income properties, the 45 day clock starts when the first property closes.
- All income from sale must be rolled into purchase (equal or greater to sale)
There are four major red flags that often pop up when trying to complete a 1031 exchange.
- Seller Financing - Does not work when selling your property, but would work for the purchase property.
- Family - Cannot buy from or sell to related parties.
- Intermediary - Unfortunately, there is a lot of fraud because there is no license or bonding needed.
- Vesting - Same tax payer has to sell and buy each property. If you want to use an LLC and owners want to sell and buy, then all parties within the LLC need to be on board.