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How To Leverage The 1031 Tax Exchange
Dated: December 17 2020
How To Leverage The 1031 Tax Exchange – “Get The 411”
December 16, 2020 Category : LBI Home Sale, Investor, Seller, General By : LBI Living
Are you considering selling your LBI Investment Property?
You need to explore the 1031 tax-deferred exchange program. This program will allow you to sell your current Long Beach Island investment property and buy a like-kind property deferring your capital gains tax upon the sale.
There are some critical points of the 1031 Tax Exchange that you need to know to see if this option should be utilized given your situation and future needs. As always, LBI Living Realtors recommend you consult your accountant but want to share some vital information that will be highly helpful.
Executing a 1031 tax exchange offers you the deferment of your capital gains, providing you reinvest in another investment property of equal or greater value to get the full tax deferral. It is important to note that 1031 exchanges cannot be used on second homes. 1031’s can only be exchanged on investment properties. You may exchange any LBI investment property, be it residential to commercial, commercial to industrial, raw land, single-family to multifamily, just to name a few. You cannot utilize a 1031 tax exchange for any other type of investment such as artwork or cars; it needs to be real estate.
What are some advantages to the 1031 Tax Exchange
1.Freeing up more capital for investment in the replacement property
2.Allows you the deferment of long-term capital gains as they are getting reinvested into the new property
3.Your initial investment receives long term appreciation
4.Allows you to use all the LBI home sale proceeds to invest in your new investment
Why might I consider utilizing a 1031 Tax Exchange:
1.Locating a property that can produce a better ROI
2.We are shifting from a self-managed property (you) to a professionally managed property—the hands-off approach.
3.Selling one asset to acquire several properties/doors. IE: LBI Single-Family to LBI Multi-Family
4.You are resetting the depreciation. For example, if your LBI investment property sells for more than its depreciation value, you may have to recapture the depreciation. In short, this would be included in your taxable income from the sale of that property.
What are some of the 1031 Tax Exchange rules:
1.The 200% rule -This rule will allow you unlimited replacement properties as long as their communitive value does not exceed more than 200% of your current LBI property’s value.
2.3-Property Rule- You may acquire three properties regardless of their property value
3.The 95% Rule- You can identify as many properties as you want, providing that the properties acquired are at 95% of their total or more
IMPORTANT– You must meet the criteria of at least one of the above rules to identify an alternative property to be VALID…
Let’s take a quick walkthrough of this process. We would list your LBI home and sell it just like any other Long Beach Island real estate sale. Once the contract is signed, an exchange agreement would be held where the property will transfer to an exchange company, attorney, or other trusted third party. Once the LBI property’s settlement occurs, you have 45 days to locate and enter into a sale contract with another investment property of equal or greater price.
1031 Tax Exchange Steps and Timeline- IMPORTANT
1.Sell existing LBI property
2.A qualified intermediary will accept the proceeds from the sale- Cannot be YOU…
3.Within 45 DAYS, identify the replacement property
4.An intermediary will transfer your proceeds from the LBI property sale to the seller (your replacement property)
5.Within 180 DAYS, complete the new purchase property
A 1031 exchange is an excellent opportunity to explore, and should you decide to sell your Long Beach Island property under this process, we recommend that you consult with a professional. The 1031 exchange was coined from section 1031 of the US Internal Revenue Code.
We hope that this overview of the 1031 Tax Exchange has been helpful and look forward to helping you with all your LBI Real Estate Market needs.
Click Here to Get Educated… We look forward to educating you all along the way.
The Van Dyk Group, RealtorLBI Area Real Estate Experts
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