One program that many people have heard about, but few have much knowledge about, is the 1031 Exchange. In response to the myriad misconceptions I've seen circulating about it, I've decided to shed some light on what the 1031 Exchange is, how it works, and how it can benefit its user.
As a whole, the 1031 Exchange is a way to defer taxes when a home buyer sells one investment property and rolls the proceeds into another. Normally, you would need to pay capital gains taxes on these proceeds, but in this instance those taxes can be deferred with gains being used into the purchase of a similar investment property. When buying a home on the Treasure Coast, the 1031 Exchange can provide an immediate tax savings, but keep in mind these taxes are deferred, not eliminated.
Who can take advantage of the 1031 Exchange? The IRS defines the owners of investment and business property that may qualify for a Section 1031 deferral as "individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031." This seems vague, of course, but there are also a few rules that are not as loose.
Real Estate Cannot Be Used for Personal Use
The 1031 Exchange solely applies to investment property. It cannot be used by personal residences, second homes, etc.
Must Be a "Like-Kind" Exchange
Most real estate will be "like kind" to other real estate, as quality or grade is not important. One exception would be that real estate in the United States is not "like kind" to foreign property. Certain types of property are specifically excluded from Section 1031: inventory or stock in trade; stocks, bonds, or notes; securities or debt; partnership interests; certificates of trust. The new investment must also be equal or better value, which can be spread out over multiple properties (e.g. you may sell a $500,000 investment home in Stuart and purchase two $250,000 homes for sale in Port St. Lucie).
Timelines to Meet for 1031 Exchange
45 Days: this is the time you have from the closing of your current investment to purchase a new investment. You don't have to close on the new investment within the 45-day window, but you will need to identify it, meaning delivering a written notice or offer to the seller of that next property.
180 Days: Once you have identified your next investment, you have 180 days to close on that next property and have title in your name.
You Can't Access the Proceeds
One very important rule of Section 1031 is that you cannot have access to the proceeds of sale of the previous investment. The money will needs to be handled by a qualified third party, among whom the IRS has excluded: Realtors, accountants, attorneys, investment bankers, anyone who was your employee in the past 2 years.
Remember to get a local market report or check the latest sold homes on the Treasure Coast to determine the activity around you. From there, contact us 24/7 at (772)233-9850 to get a more analytical and precise valuation for your own home.