Demystifying the 1031 Exchange Real Estate Transaction

👉 Did you know you can sell your investment property and not pay taxes?

Let's talk about the 1031 exchange!

The what?!?

1031 is the section of IRS code that allows you to LEGALLY defer taxes on the sale of your investment real estate.

Here's the skinny:

1031 exchange definition:
A 1031 exchange is a process that real estate investors use to defer paying capital gains on the sale of their real estate investments.

Woah, Is this legal?
Yes, it’s totally legal. The IRS has strict rules and timelines for how this works, and some people call this the “like kind exchange”.

What does 1031 mean?
It refers to the section of the US tax code that deals with the sale of investment property.

Why do investors use 1031 exchanges?
The main reason investors conduct at 1031 exchange is so they can sell an investment property and buy another one while deferring any capital gains taxes that would normally be due upon sale of the property they sold.

That means they can invest ALL THE PROFITS from the sale of their previous property into the new property and leverage that money instead of paying the IRS.

There are a lot of other reasons investors use 1031 exchanges - we’ll cover those details in another video.

What are the general rules of a 1031 exchange?
*Same Owner - title must be held in the same name for the relinquished (sold) property and the replacement (new) property. Owner can be a person, LLC, corporation, trust, etc.
*Investment property - the property must be used for business purposes, not a personal residence.
*US only - with few exceptions, you can only use a 1031 exchange to sell and buy investment property in the United States.
*Use it or Boot it - when the value of the replacement (new) property is less than the value of the relinquished (sold) property, the difference is called the boot. Since not all the profit from the sale was used to buy the new property, the investor pays tax on the difference - the boot.
*Mortgages - mortgaged properties can be used in 1031 exchanges. In order to ensure you defer all the tax, the mortgage on your replacement (new) property must be higher than the mortgage on your relinquished (sold) property. Otherwise you’ll have to pay tax on the boot.
*Money Handling - an intermediary known as an accommodator handles all the money during a 1031 exchange to ensure that the investor never touches the money. Otherwise, tax will be due. The investor pays the accommodator a fee for facilitating the 1031 exchange.
*Related parties - you can do a 1031 exchange between related parties, but there are extra rules around this to make sure it’s done legally.

What are the timelines of a 1031 exchange?
You have 45 days from the closing date of the relinquished (sold) property to identify up to 3 replacement (new) properties.

You have 180 days from the closing date of the relinquished (sold) property to close on the replacement (new) property.

NO EXCEPTIONS.

Holidays, weekends, weather, illness do not change the timelines.

DISCLAIMER: We are not tax or 1031 exchange advisors and all information should be verified with licensed, qualified tax professionals and 1031 accommodators.

Want more details on how to legally pay zero taxes on the sale of your rental property?

Call us!

CONTACT US FOR MORE INFORMATION:
SUZANNE MOORE
Licensed Oregon Realtor®

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SARAH WILLIS
Licensed Oregon Realtor®