The 1031 Exchange is a perfectly legal way for you to replace current investment properties with more valuable “like kind” property and not owe a cent in capital gains tax. Established by the IRS in 1990, Section 1031 of the IRS Code states that property held for investment may be exchanged for other investment property, with the proceeds from the relinquished property applied toward the purchase of the replacement property, deferring capital gains. Properties that qualify for 1031 Exchange include:
When the IRS states that the properties in a 1031 Exchange must be like kind, it does not mean that they must be in the same category; e.g., if you own apartments, you do not have to replace them with apartments, you may replace them with an office building, strip mall or undeveloped land, as long as those properties are designated as investment properties. Personal residences and vacation homes used by you are not eligible for the 1031 Exchange.
When you decide to sell your existing investment property under a 1031 Exchange, all the profit you receive from that sale is applied to your replacement property, enabling you to purchase a more valuable property than you would with a traditional sale that taxes your profits. In essence, by deferring the capital gains tax, the money you save becomes part of your new investment holdings, increasing the net worth of those holdings. In addition, once you have purchased the replacement property, you can refinance it and use any resulting cash as non-taxable loan proceeds. 1031 Exchanges may be continued in perpetuity, as long as you replace one investment property with another such property.
In order for a 1031 Exchange to proceed, the IRS specifies that the transaction needs to be handled by a “qualified intermediary.” That qualified intermediary acts as a third party, taking possession of the funds received from the sale until they are needed to purchase your replacement property. I can refer you to a number of qualified intermediaries who are well-versed in the specific requirements regarding deadlines and the proper paperwork, and will make sure that your 1031 Exchange goes smoothly.
Considering a 1031 Exchange program in Florida? Contact me at laura@FloridaOnYourMind.com or 561.352.5214 and I’ll work with you to find an investment property that qualifies for exchange and comfortably fits your financial situation. If you already own investment property, I’ll help find suitable replacement properties that will increase your investment portfolio holdings.
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