1031 Exchange- what is it and what is its purpose?  

If you own investment property and are thinking about selling it and buying another property, you should know about the 1031 tax-deferred exchange. This is a procedure that allows the owner of investment property to sell it and buy like-kind property while deferring capital gains tax. On this page, you'll find a summary of the key points of the 1031 exchange - rules, concepts, and definitions you should know if you're thinking of getting started with a section 1031 transaction.   

A 1031 exchange, also known as a like-kind exchange or a Starker exchange, is an IRS tax deferral strategy that allows investors to sell one property and acquire another similar asset without paying capital gains taxes.   

It requires the real estate investor to replace the value of the debt from the relinquished property that is sold. The value of the debt can be replaced with a combination of sources including a private money loan, seller-financing, traditional financing or cash.   

By using this strategy, investors can build wealth by reinvesting their profits from the sale of an investment property into other assets such as real estate.  

So how does the 1031 exchange work?  

The process begins when you decide to sell your investment property. You then need to identify another replacement asset within 45 days after the sale and complete all paperwork for the purchase within 180 days. When you complete these steps, your capital gains liability can be deferred until you eventually sell the replacement asset - allowing you more time to accumulate wealth through continued investments in real estate while avoiding immediate taxation on those profits.   

The key requirement that must be met for a successful 1031 Exchange is that both properties must meet certain criteria under IRS guidelines; they must be considered “like-kind” assets (real estate for real estate).   

Additionally, any proceeds from selling your original property must go directly towards buying or improving upon the new one; if any funds are taken out during this transition period - even just temporarily - then those funds will become taxable income and no longer qualify for protection under Section 1031 of The Internal Revenue Code (IRC).   

Reverse 1031 loans are also available for investors who want to acquire the replacement property prior to selling their existing real estate. 1031 exchange financing provides fast and flexible funding and allows real estate investors to quickly acquire a new property and prevent paying capital gains taxes.   

What is the 200% rule as it relates to tax deferred exchanges?   

The 200% rule allows you to identify unlimited replacement properties as long as their cumulative value doesn’t exceed 200% of the value of the property sold.   

To begin a 1031 Exchange process with confidence and accuracy it's important that investors seek qualified help from experienced professionals who specialize in these types of transactions, so they understand all associated risks involved with each step along their path towards success!  

Don't forget to give us a call today at 949-243-7900 so we can help you navigate your real estate investment decisions and provide you with the best mortgage and financing options available to continue to grow your real estate investment through leverage opportunities. The best investors prepare ahead of time, and we are here to help!