Have you heard the term 1031 exchange discussed amongst investors or CPAs? Maybe they called it a tax deferred exchange, or maybe even a deferred like kind exchange. They are most likely referring to the same thing. A 1031 exchange gets its name from the US Internal Revenue Code (IRC) Section 1031 which provides that a taxpayer may sell real property and postpone paying tax on the gain, if that taxpayer reinvests the proceeds to acquire a qualifying like-kind replacement property. Why do investors like these exchanges so much? One of the biggest reasons is it allows them to leverage dollars that would have otherwise been paid to the Federal Government in the form of taxes if they had just sold their property. There are other reasons though. I performed an exchange where I sold a property that was out of state to buy something here in Hawaii. I did this because I felt future appreciation potential was greater in Hawaii and I also wanted the investment closer to home so I could self-manage the rental.
When does it make sense to go through a 1031 exchange: There are various reasons you’d want to go through this process and to me the biggest consideration is that the capital gains tax of the sale is significant. Significant is a relative term. You should consult with your CPA or tax attorney to help you determine this. I’ve had opportunities to do 1031 exchanges but ended up passing on them because like one of my business partners likes to say, “the juice just wasn’t wort the squeeze.” In other words, the gains taxes were not big enough to make an exchange worth all the effort. You see there are requirements, timelines and additional costs involved in these exchanges that need to be considered. I won’t get into the details in this blog but if you want more information click on this link (https://realestateofhawaii.com/1031exchange) to download a great informational booklet on the details for 1031 exchanges.
This is probably also a good time to point out that I’m in no way giving you, the viewer, professional tax, legal or investment advise, all situations are different, so please consult with your CPA, attorney or licensed investment professional.
Still considering a 1031 exchange? Awesome. Ok so you determined by talking to your CPA that this may be worth it to look into. Now if you haven’t done so already, assemble the rest of your team! The next member to find is your QI or Qualified Intermediary. To facilitate exchanges IRC section 1031 allows taxpayers the use of a QI to stay in compliance with the tax code. Your QI can hopefully educate you on the requirements needed for the exchange. If you haven’t found a real estate agent, its important you find one that is experienced with 1031 exchanges. The timelines for 1031 exchanges are strict and leveraging an agent that understands these timelines can make the difference of you successfully executing your 1031 exchange and deferring those otherwise taxable gains. It is important to be in sync and on the same page as your realtor, and with all your service provider for that matter, as the intricacies of these exchanges can be more involved than the typical real estate transaction. Other team members to consider are attorneys, property managers, construction contractors, handy people, cleaners, and escrow companies to name a few.
If you want to talk about your situation and if 1031 exchange may make sense in your situation, set up a call with me here (https://calendly.com/deanueda/30min?month=2020-06) to schedule a call with me. I’d love to talk to you.
