A 1031 exchange allows you to sell an investment or business-use property for another business or investment use property of equal or greater value deferring capital gains tax, depreciation recapture tax, state taxes, and healthcare tax. Below are 10 things to know about 1031 exchanges.
- To defer all capital gains, depreciation recapture tax, healthcare tax, and state taxes you must purchase a replacement property for equal or greater value of the relinquished property’s net selling price. The net selling price is the contract price minus closing costs. If an investor cannot or decides not to find a replacement property of equal or greater value of the relinquished property then they are subject to pay taxes on the difference.
- The property must be held for investment or business use only. This may be the most important of all things to know about 1031 exchanges.
- All investment real estate qualifies for a 1031 exchange. This includes land, commercial real estate, single-family homes, multi-family homes, and condominiums.
- Property that does NOT qualify for a 1031 exchange includes primary residences, secondary homes, and property not intended for business or investment use.
- Investors have a total of 180 consecutive days to complete a 1031 exchange. The 180-day clock begins the day you sell your relinquished property.
- Within the first 45 days of the 180 days investors must identify up to three replacement properties of any value. Only these properties qualify for the 1031 exchange. Investors can identify more than three replacement properties but the sum of their total value cannot be more than 200 percent of the relinquished properties net selling price. By day 180, the investor must close on all intended replacement properties that they identified during the first 45 days.
- Investors must use a qualified intermediary to complete the exchange. The qualified intermediary cannot be an agent or fiduciary of the investor such as their realtor, CPA, attorney, or financial advisor. It’s also beneficial to hire a qualified intermediary with their Certified Exchange Specialist® designation (CES)®. Midland 1031 has two Certified Exchange Specialists® on staff.
- You do not have to exchange the same type of property for one another. You can exchange commercial property for residential, or residential property for a piece of land. You can even exchange one property for multiple properties or you can consolidate multiple properties into one.
- With careful planning you may never have to pay taxes. Simply follow the 1031 exchange rules every time you sell one or more properties and buy replacement properties. When you die, your estate forever escapes all capital gains taxes. Consult with your CPA or tax advisor to properly plan.
- To begin a 1031 exchange you must contact a qualified intermediary BEFORE you close on the relinquished property.
Although we have armed you with the above 10 things to know about 1031 exchanges, these can be complex actions that require care and detail to perform. For more information on 1031 exchanges contact Midland 1031 at 239-333-1031 or visit www.MidlandTrust.com.