If you have plans to sell your property and buy another property from the money gained from your recent sale then you must definitely know about the 1031 exchange. This 1031 exchange is basically helpful for investment property owners who are constantly buying and reselling in real estate markets.
What is 1031 exchange?
The exchange helps you to avoid paying capital tax gains after reselling your investment property. It helps you to reinvest more in similar types of property or any property that has more gain than the previous one.
Who needs to utilize the 1031 exchange?
Any investor who is looking to get more return prospects by selling their investment property.
Anybody who wants to own a managed property
For investors who want to segregate one single property into multiple assets.
Any property owner who is willing to recapture depreciation
Guide to the replacement property
When you are opting for a 1031 exchange, your next type of investment is defined according to the property location and not with the grade of the property. For instance, you can exchange your commercial building for a warehouse and a residential building can be exchanged for vacant land. Any like-kind properties can be replaced and they are applicable for 1031 exchange.
Investors who applied for the 1031 exchange have a timeline of 180 days. Within 45 days of the sold date, you must have found your replacement property. Within 180 days the total purchase needs to be completed. There are three sets of rules for applying 1031 exchange in your new property purchase. You must meet at least one of the rules to apply for a 1031 exchange. The three rules are given below
3 property rule
200% rule
95% rule
3 property rule – It allows you to find the three best properties that do have good potential market value.
200% rule – You can go for unlimited replacement options if your cumulative value does not exceed 200% of the previously sold property.
95% rule – It can help to get multiple properties within the 95% value of acquired properties.
1031 is highly effective in deferring the capital gain taxes. When your capital taxes are less, you have more capital to invest in your new property. But 1031 exchange transactions are highly complex and that’s why you need tax consultants or professionals to help with it.