As an investor, does the term “1031 exchange” mean anything to you? In a most basic definition, a 1031 exchange allows a property owner to defer paying a capital gains tax from the sale of their investment property, by exchanging it for a similar, qualifying, property. Of course, there are rules and regulations, but every savvy investor should be aware of 1031 exchanges and know how to use them to save some serious cash!
In an article written by Matt Faircloth on BiggerPockets.com, four rules are laid out to help serve as a guide to those property owners thinking about a possible 1031 exchange. There is also a great video attached, offering more in-depth information. Here are Matt’s four rules:
- It must be a qualified transaction, meaning the property you sell must be held for investment intent. You have to hold it for passive income, not capital gain. In other words, fix and flips don’t qualify.
- The property you sell and the one you buy must be held by the same owner. This means you can’t sell a property held in your personal name and buy one through an LLC. Watch the video for an idea how to get around this one!
- Once you sell, you have 45 days to identify potential new purchases and 180 days to actually close on the transaction.
- There are no extensions, meaning if you don’t close that new purchase 180 days after you sell, you have to pay tax on the gain. No exceptions.
If you have an investment property, and you feel it can make you serious money now, use the 1031 exchange to your advantage.
To view the full BiggerPockets article, and watch Matt’s video, click here.