Tip #22: What is a 1031 Exchange?

What is a 1031 Exchange?

It seems almost every other day, a client contacts our firm in need of a 1031 exchange property. They are unfamiliar with the 1031 exchange and need guidance from beginning to end. As an experienced 1031 exchange Broker, it is our goal to provide the best possible investment property for their 1031 exchange. We aim to find a property that produces solid annual cash flow, but also the opportunity for the asset to appreciate in value moving forward.

Definition of a 1031 Exchange

A 1031 exchange occurs when a seller owns a second property (non-primary) and would like to setup a transaction to avoid the capital gains tax when selling their non-primary residence.

This type of transaction allows for the seller to purchase a new property within 45 days of the sale of their first property in order to avoid the capital gains tax.

A 1031 exchange can only take place if you are selling your non-primary residence and purchase like-minded property. The means you must purchase a home similar to the one you are currently selling. For example, you cannot trade the sale of land for a multi-family building. The properties must have common elements when swapping them out.

Once the purchaser identifies the new property within a 45 day time period, they must close on that property within 6 months time. Failing to do so, nullifies the 1031 exchange and imposes the capital gains tax on the seller.

Further 1031 Exchange Notes

To fully protect and properly execute a 1031 exchange, a 1031 financial intermediary must be hired immediately to ensure all funds transferred go into a 1031 escrow account. If this is not handled correctly, the entire 1031 exchange can be destroyed.

As an experienced 1031 exchange Broker, I highly recommend having a high caliber Broker ready to help you through the entire transaction. It is not advisable to wait until the end of the 45 days to secure your property, as a deal can fall through. In fact, it may be wise to consider multiple 1031 exchange options that are available in order to have a back-up in case of some form of emergency with one of the properties you have been seeking.

For further advice on a 1031 transaction and assistance in locating a 1031 exchange property, please contact us at garayrealestate@gmail.com