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What is a 1031 Exchange in Real Estate Investing?

Michael Nolen, Realtor®
by Michael Nolen, Realtor® on October 5, 2017 at 10:51 AM

1031 exchanges are common in real estate investing. You don't need to be a big time flipper to benefit from it. If you're thinking of selling your second home or investment property you may want to consider your possibilities with the profit from your sale or you could have some heavy tax consequences from capital gains.

In this article, I'll shed some light on 1031 like-kind exchanges, so you can start thinking about your options for buying a new second home or investment property before you sell your home.

It's important to understand you need to have a conversation with your accountant or tax attorney about how a 1031 exchange will specifically affect your personal situation. However, as a real estate agent, I'm familiar with the process and can be an asset in your new real estate purchase.

 

What You Need to Know About 1031 Exchanges in Real Estate Investing?

 

What is a 1031 exchange?

A 1031 exchange takes place when an investor sells a property and reinvests the proceeds from the sale into the purchase of a new property. This allows capital gain taxes to be deferred.

Let's look at an example

Let's assume a real estate investor or someone that owns a second home or investment property sells their home and has a profit of $100,000. If the investor does not buy another property, they may need to pay capital gains taxes. Capital gains taxes could be as high as 35% (contact your accountant or tax attorney for details).

In this example, the investor could end up paying as much as $35,000 in taxes. Instead, if the investor takes their profit of $100,000, and buys another investment property, they could defer their capital gain taxes to a later date.

 

You'll need to find a new home within 45 days

After you sell your home, you'll need to identify new properties within 45 calendar days. This may seem like a short period of time. It's important to begin your property search before you sell your home. This will allow you to narrow down your next purchase making it an easier and faster selection process when your 45 day period begins.

Simple selecting a property isn't all you need to do. Replacement properties must be clearly described in the written identification. The IRS has guidelines for the maximum number and value of properties that can be identified. 

 

Looking to buying a home in Ocean City, MD? Easily search all Ocean City, MD real estate for sale in my website here

 

Buying a new home or condo within 180 days

After you sell your home, you'll need to buy another home within 180 calendar days, or the due date (including extensions) to file your tax return for the taxable year in which your property was transferred, whichever is earlier.

Basically, you'll have to find and buy a new property within 180 days from the date you sold your home.

 

Benefits of working with a real estate agent

Whether you're thinking of selling your home, your home is listed for sale, or you're ready to buy a new home, it's beneficial to start looking at homes for sale now. Working with a real estate agent can help you narrow down your search and prepare yourself for buying a new home. if you're considering a 1031 exchange, you'll have a limited amount of time to select your new home, so it's critical to aggressively search the local real estate market.

 

Helping buyers in the Ocean Pines, Ocean City, MD real estate market

As a local real estate agent, I'll help make your home search easier. I've developed a strategic home buying process to make the home search easier.

 

Strategic home buying process:

  • Schedule an initial consultation to understand your goals and criteria

  • Send an initial list of all active homes for sale within your criteria

  • Schedule a follow up consultation to discuss active homes for sale and properties you're interested in

  • Preview listings and record a video walk through (with permission) to send to you before your scheduled showings

  • Conduct research on properties you're interested in so you can make educated buying decisions

  • Gather estimated Vacation Rental rates or year round rental rates if interested in buying a rental property

 

Schedule a free buyer consultation today

Let's discuss your options

When you schedule a free consultation with me, I'll discuss all of your options and go over my strategic home buying process and how it makes buying a home easier!

 

Contact Michael

 

Disclosure: This article is for informational purposes only. Consult with an accountant or tax attorney for specifics about your tax situation.

Resources:

IRS website: Like-Kind Exchanges Under IRC Code Section 1031https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031

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Michael Nolen, Realtor®
Michael brings a diverse background of mortgage, loan servicing and housing experience. Michael offers his clients a variety of helpful resources, guides and services that helps make buying and selling Salisbury, Ocean Pines and Ocean City, MD real estate delightful and educational.
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