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Investing In Real Estate

Sometimes when people buy their very first home, they think more about the interior finishes than they do about their overall investment. Unfortunately, since your home is one of the largest expenses you will ever have, investing in the right property is crucial to your overall financial success. I have purchased several homes over the years, and understanding how to find the perfect house is crucial to your success. This blog is all about investing in real estate to improve your personal situation, so that you don't have to worry as much about making that next mortgage payment. By choosing the right place, you can enjoy your neighborhood and your financial situation.

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New To Using The 1031 Exchange Program? 4 Important Things To Know

Taxes are an important concern for any investor, especially when dealing with large transactions such as those relating to real estate. One of the strategies available to help is the 1031 exchange. 

What is a 1031 exchange? 

The 1031 exchange is named for the section of the Internal Revenue Service (IRS) code from which it is derived. In short, IRS Code Section 1031 allows the exchange of one like-kind property for another without forcing the investor to recognize an associated gain or loss for the purposes of taxation. This allows capital gains taxes to be deferred instead of becoming due with each transaction, as long as specific rules are followed. 

What are some examples of like-kind 1031 exchanges? 

While the IRS wording is somewhat vague regarding how a like-kind property is defined for the purpose of 1031 exchanges, some common examples include: 

  • both improved and unimproved properties
  • all types of residential real estate (excluding the personal residences of the investor)
  • commercial, retail, and industrial properties 
  • businesses, farms, and ranches 

The IRS also does not specify that types of property exchanged must be of the same specific type, as long as both parcels fit the general guidelines for value and are true investment properties. For example, a parcel of undeveloped raw land could potentially be exchanged for a single-family investment property, business, farm, etc.

Can single properties be exchanged for multiples or vice versa? 

The answer to this question is yes, as long as the basic value guidelines are in line with IRS guidelines. According to the IRS Code Section 1031, one or more like-kind properties can be exchanged for another as long as the value of the property or properties being exchanged is equal or greater in value to the one or ones that the investor will be receiving. 

Can a personal residence qualify for a 1031 exchange if converted to an investment property? 

As long as a personal residence (or a second home or vacation property) is used by the investor for their own uses, it will not be eligible for use inside a 1031 exchange. However, property owners who convert these properties to rental or investment properties, such as when a new primary residence is purchased and the original home becomes a rental, can then move ahead with a standard 1031 exchange. 

To learn more about using a 1031 exchange for investment properties, investors can discuss their situation and investment goals with a reputable real estate professional who offers verifiable experience in working with investors and investment properties. 

For more information on property exchanges, contact a real estate professional.