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1031 Exchanges: Everything You Need to Know

Home River Group - Spokane - Tuesday, April 4, 2023
Property Management Blog

In 2021, the global real estate market was expected to have a value of $11.4 trillion. By 2031, that number is expected to reach a whopping $30.5 trillion.

Real estate investing is a great way to make and grow your money. For most real estate investors, once they start investing, they want to keep going. This growth is likely for a few reasons.

How does a real estate investor grow their portfolio and, more importantly, grow the value of the properties they buy? Many use 1031 exchanges as a way to increase the value of their properties, all while avoiding costly tax implications.

What does a 1031 exchange involve, and does it provide the right benefit to follow the intricate steps involved in a 1031 exchange? Read on to learn more.

What Is a 1031 Exchange?

A 1031 exchange is a real estate transaction approved by the IRS that allows for one property to get sold while avoiding the tax implications of capital gains from the sale.

It's important to note that while a 1031 exchange can be explained as a relatively simple idea, sell one and then buy another, the rules for a 1031 exchange are stringent. They must be followed to the letter, or you will lose the tax benefit.

If you sell a property and profit from it, you usually pay capital gains taxes on that property. Instead of paying those taxes, you can invest the profit into a new property.

How Do They Work?

1031 exchanges come with several time requirements in the process of selling, then buying a new property.

When you're ready to sell, you must be prepared to move quickly on the new property purchase. The 1031 exchange rules you have 45 days from when you close on the original property to identify a new property you could buy.

You can actually identify up to three potential properties. These properties must be like-kind properties from the one you're already selling. Generally, this means the new property must be the same type as the one you're selling.

Then you have 180 days to close on the new property from the sale of the previous one.

In order to avoid capital gains taxes, you use the profit from the sale to invest in the new property. However, the new property must be more valuable than the one you sold.

From when you sell until when you buy again, your money must get held by a third party called a qualified intermediary. This must be an independent person, company, or entity from you.

Benefits of 1031 Exchanges

When you buy real estate and sell real estate, you hope you're making money. As an investor, the benefit of a 1031 exchange is that you avoid capital gains taxes on your profits.

The idea for most investors is that you keep reinvesting until later in life when your tax bracket is lower, and the capital gains taxes won't cost so much.

Understanding 1031 Exchanges

1031 exchanges offer great tax benefits for real estate investors who want to continue investing. Many who own properties for rent use 1031 exchanges to grow their rental property portfolios.

If you're that investor, we can help you with your Spokane property management needs. Contact us today to discuss your properties and how our services can benefit you.