1031 Exchanges - What Do They Mean For Your Investment Property?

We get a lot of questions about 1031 exchanges from people asking what they are and how to make them work. We help many investors buy and sell rental properties and as a result, we've helped many people do 1031 exchanges and they can benefit you too, if the situation is right.

What is a 1031 Exchange?

The 1031 Exchange is also known as a Starker Exchange. It’s a strategy for rental property owners to make a tax deferred property exchange. Essentially, you’re selling one property and getting another property or multiple properties. There are several requirements involved in this type of transaction and instead of paying capital gains tax now, you can defer the tax and invest the proceeds from one property by purchasing another.

1031 Exchange Requirements

You are required to exchange like kind properties. This can be done in all states; but you do have to buy the property within the United States. For example, if you sell a property in Virginia for $1 million, and your loan is for $500,000, you have to purchase real estate that’s equal to $1 million, and you must have a loan of at least $500,000. It can be one property or spread out over two or three properties. The value simply has to meet the requirement.

1031 Time Requirements

You need to identify up to three properties to buy within 45 days from the time that the property you currently own closes. So, if you go to settlement on March 31, you have 45 days from that time to identify three properties. It can be sooner, but that’s the deadline. Then, you have to close on the new property within 180 days after closing on your first property.

Choose your next investment property wisely. If you’re coming from a market with a lot of appreciation and you have equity, it’s great to diversify and put the money into properties in up and coming markets. Take advantage of the growth. Lots of areas can offer great investment opportunities.