{"id":1282,"date":"2018-08-30T14:31:09","date_gmt":"2018-08-30T19:31:09","guid":{"rendered":"http:\/\/www.realtyhop.com\/blog\/?p=1282"},"modified":"2022-05-31T11:15:28","modified_gmt":"2022-05-31T15:15:28","slug":"what-is-a-1031-exchange","status":"publish","type":"post","link":"https:\/\/www.realtyhop.com\/blog\/what-is-a-1031-exchange\/","title":{"rendered":"What is a 1031 Exchange"},"content":{"rendered":"
Real estate investors have to pay tax; that\u2019s part of the process. However, investors can take advantage of IRS Section 1031<\/a>, also known as a 1031 Exchange or like-kind exchange, to exchange a piece of property for another one without paying taxes on the capital gains.<\/p>\n A 1031 exchange is a tax deferment strategy that allows investors to defer paying taxes on capital gains from selling an investment property as long as they purchase another like-kind property. The program allows their assets to grow tax-deferred.<\/p>\n According to the IRS<\/a>, Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts, and any other taxpaying entity may participate in a 1031 Exchange. Individuals can use any non-owner-occupied property in this exchange. Therefore, if you own a second property that you are considering selling, you can use this strategy to acquire another property and defer any taxes on capital gains. Investors can also change the form of their investment repeatedly without cashing out or recognizing any capital gain.<\/p>\n Investors are then only mandated to pay long-term capital gain taxes once they are ready to cash out. Typically, they will pay 15% \u2013 20% depending on income on their profits from the final cash out. As of 2022, when a single taxpayer\u2019s income from the profits falls between $41,676 and $459,750, they will pay 15%. Married couples or those filing jointly pay 15% when gains fall between $83,351 and $517,200. Any kind of taxpayer who makes more than the 15% bracket will pay 20% on their income.<\/p>\n How much will you have to pay? Use the 1031 Exchange Calculator<\/a><\/em><\/p>\n Although Section 1031 applies to the exchange of all real property, this article uses real estate-specific examples.<\/p>\n To qualify for a 1031 exchange, you\u2019ll need to stick to the following rules: <\/p>\n The properties involved in the 1031 exchange must be of like-kind. Like-kind properties are vague in their classification but essentially must be of the same nature or character, even if they differ in grade or quality. Both properties must also reside in the United States.<\/p>\n You can also exchange multiple properties for one property, or one property for multiple properties as long as they are all of like-kind. The following examples show the difference between like-kind and not like-kind properties.<\/p>\n You can trade most property as long as it is not personal property. For example, you cannot trade the primary home you reside in for another one and claim 1031 exchange benefits.<\/p>\n To get 100% tax deferment, the IRS requires that the net market value and equity of the replacement property purchased must be the same as or greater than the relinquished property sold. For example, if an investor sells a $1 million property in San Jose with a $650,000 loan, they must buy $1 million or more of replacement property with at least a $650,000 loan to qualify.<\/p>\n In addition to greater or equal value, the same taxpayer must be involved in the entire process to qualify for the 1031 exchange. However, single-member limited liability corporations are accepted, meaning the single-member LLC can sell the relinquished property. Then the sole member of the SMLLC can purchase the replacement property directly under their name.<\/p>\n Investors might use a \u201cboot\u201d of extra cash or property to make the value of the two properties equal. However, boots are tax liable. You cannot avoid paying taxes on this additional portion of the transactions. <\/p>\n It may be difficult to precisely time the deal when exchanging one property for another. Therefore, there are two rules in place relative to the timing of the transaction. You must follow both to exchange properties successfully.<\/p>\nWhat Is a 1031 Exchange?<\/h2>\n
1031 Exchange Rules<\/h2>\n
Like-Kind Property<\/h3>\n
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Greater or Equal Value<\/h3>\n
Same Taxpayer<\/h3>\n
No Received Boot<\/h3>\n
Timeline<\/h3>\n