We work with real estate investors who sometimes ask us about the value of a 1031 exchange. We don’t do these ourselves at New Bridge Management, but we know enough about them to give you some information. A 1031 exchange occurs when a property owner sells a property, then identifies and purchases another property in order to avoid capital gains taxes.
There are certain steps to follow when you want to complete a 1031 exchange.
1031 Exchange: Purchase a Like Property
One of the first things you have to do is sell the property you currently own and purchase a like property. That means you cannot sell a business and decide you’re going to buy real estate through a 1031 exchange. It has to be real estate for real estate. So, you can sell a single family home and then purchase a multi-family, commercial, or even an agricultural property. When you sell one property investment, you must purchase another property investment.
1031 Exchange: Timelines and Deadlines
You have 45 days from the close of escrow on your sold property to identify the like property or the other investment you’ll purchase. Then, you have 180 days after you sell your property to close on your new property.
1031 Exchange: Utilize an Intermediary
You are required to utilize an intermediary when you’re doing a 1031 exchange. The professional you work with can help you with many things. For example, there are several IRS forms that are necessary when you’re deferring your capital gains taxes. You’ll have your intermediary to handle all that for you. Also, you cannot take any funds out of escrow when you’re doing this exchange. Your intermediary will handle all of the funds.
These are some of the things you have to keep in mind with a 1031 exchange. Make sure you always talk to your accountant first. There’s a cost to this exchange, and you want to make sure those costs do not outweigh what you save in deferring your capital gains taxes. If you’re buying and selling multiple properties this way, you could have costs that add up to $9,000 or more. You need to decide which path is more financially advantageous.