What is a 1031?

A 1031 Exchange is an incredibly useful tool for any real estate owner, broker or investor to increase net worth of real estate. This type of transaction is designed to put the proceeds of a sale (cost basis and capital gains) of real estate into useful equitable channels instead of paying hefty taxes on capital gains. Often referred to as trading up, using a 1031 exchange allows investors to sell one property and invest in another consecutively that has a higher value. This allows investors to restructure their portfolios and ideally increase both net worth and cash flow while deferring all taxes from the sale. Recent government incentives now allow investors to cash out their cost basis if they defer the capital gains into an opportunity zone investment fund.

How does it work?

The principle of a 1031 exchange is quite simple, for the purposes of planning all you need to know are the basics, when it comes time for execution, we suggest you hire a professional (we can help!). The first step is to sell the investment property and calculate your profits. Next, you perform the 1031 exchange by leveraging the proceeds from the sale into a new property. With the right guidance, you should be able to not only increase your net worth but also your cash flow from what you were getting on the previous investment property. We are going to call that a win win. If the property you trade into is a triple net lease property we will call it a win win win!

1031 Guidelines

1. VALUE: The key to the 1031 is the idea of trading up, you are able to defer these taxes because you are making a larger investment with your gains. Therefore, the value and equity of the properties that you exchange for must be greater or equal to the property that you are relinquishing or selling. Very important as well, you must move all the equity from the property that you sold, if you fail to do so you must pay tax on the amount of gains that you do not reinvest.

2. TIMELINE: There is an important timeline to follow for a 1031, which is ample, however it is crucial to have your ducks in a row before you begin. Once you sell your property you have 45 days to identify the exchange property/properties, and 180 days to close on the property/properties which you have identified.

3. PROPERTIES: Much the same as the timeline is the importance of notifying the IRS the properties you plan to trade up into. The main logic behind this is that a 1031 is not something you can hold in your pocket for a rainy day, here are the key points to consider:
  • 3 Property Rule: You can identify up to 3 properties that you wish to purchase.
  • 200% Rule: You can identify unlimited amount of properties as long as the total value of the properties does not exceed 200% of the relinquished property.
  • 95% Rule: You can identify more than 3 properties if you purchase at least 95% of those identified properties.

Who is this ideal for?

A 1031 exchange is a great way of shifting or expanding your investment real estate portfolio without having to get hit with costly gains taxes. Ideal candidates for this type of transaction are first, any individual that has investment properties, whether it be housing or commercial space. Very often the management and upkeep of these types of properties can be very time consuming and without the experience and expertise the return on these types of investments can be disappointing.
Real estate brokers and investors with more extensive portfolios use this often in expanding the scope of their properties as well as taking advantage of inciting opportunities without having to increase their overall investment.

How can we help?

Rittertime is built upon a solid foundation of contacts throughout the real estate industry as well as several other real estate intensive industries such as hemp and cannabis. If a 1031 exchange sounds like something that you can use to increase your net worth or cash flow we would love to talk with you further and connect you to the right people both for a property to trade into as well as our trusted intermediaries. If you like, you can provide some basic information below and we can set up a time to take the next step!

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    In 6 montsAfter 6 monthsAfter 12 monthsNot sure

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