Do you want to sell one property and replace it with another of similar value? Would you like to save some money while at it? In that case, you need to familiarize yourself with 1031 exchanges.
A 1031 exchange, also known as a Starker exchange after the leading case law on the matter, is a popular tax-deferral technique. It gets its name from Section 1031 of the IRS Code, where the law on property tax exchanges is found.
So, how does a 1031 exchange save you money? According to the law, if you sell one property and replace it with another, which is substantially similar, you can defer the capital gains taxes that you would otherwise need to pay.
In short, you won’t owe the IRS any taxes on the profits you make after selling one property, provided you use the money to purchase another similar property. That way, you can use the money to invest in higher-value properties, or even to improve the new property you are buying.
If you are looking for someone in Oregon to help with a 1031 exchange, I would look into Peregrine Private Capital as a great place to start.
When Would You Need a 1031 Exchange?
Some circumstances when a 1031 Exchange can prove to be an invaluable tool include when you want to;
• Consolidate several properties into one
• Split up a property into several parts
• Buy a property that has higher returns
• Buy a property that is under someone else’s management
Although a 1031 exchange can save you a lot of money in taxes, it is better suited for substantial investors. The law requires a high minimum investment for 1031 transactions, and the wait times for approval can be quite lengthy. These two factors make it ideal for those dealing in high-value properties.
Types of 1031 Exchanges
There are four main types of 1031 exchanges. These are;
1. Delayed Exchanges
These are arguably the most common type of 1031 exchanges. As the name suggests, they take quite some time, which is partly the reason why they are so popular.
With this type of exchange, you can sell your property before you acquire the replacement property. You will, however, need first to execute a sale agreement before you can successfully apply for the deferral.
Once you have sold the property, you must identify the new property in 45 days. Proceeds from your original property must be held in trust by a neutral party for 180 days. If you go beyond the timelines, you forfeit your chance of deferring your taxes.
This type of exchange requires that you sell your property and acquire the replacement property on the same day. This will, of course, require that you identify a buyer for your original property before you can apply for the exemption. Additionally, you must have first identified the property you intend to purchase before you can apply.
With simultaneous exchanges, delays can be a costly thing. Even if you experience problems with transferring money, your application can still be rejected if it is not made on time.
3. Reverse Exchanges
A reverse exchange is a flexible type of transaction. Here, you purchase the replacement property first, then sell your original property later. For you to qualify, you need first to identify the relinquished property within 45 days, then execute a sale agreement within 135 days. Although it is a highly flexible option, financing your new purchase can be hard since many banks shy away from this kind of investment.
4. Construction Exchanges
Finally, you can apply for a 1031 exchange for the purposes of improving the replacement property. For you to qualify, you must show that you used the exchange equity to improve the property. The property you acquire must also be similar in value to the relinquished one.
1031 exchanges offer investors an invaluable tax break. If you qualify for the tax-deferral program, you should, by all means, take advantage of it. It is better to seek professional help when dealing with 1031 exchanges owing to their highly complex nature. That way, you will not lose out on the benefits of the program because of a technicality.