If you are in an exchange, or considering doing one, SIG has a proven track record for seamlessly assisting our clients with the process. Over 65% of our business involves working with 1031 exchange clients and we have yet to have a client of ours not satisfy their exchange. Because 1031 exchanges help investors to increase wealth, save on taxes with tax deferrals, and grow portfolios, they are incredibly popular. We’ve dedicated this week’s blog posts to our most “frequently asked questions” regarding 1031 exchanges.
- What is a 1031 exchange?
A 1031 exchange is a tax-deferred exchange that allows investors to sell one investment property and use the proceeds to purchase another “like-kind” property, without paying capital gains taxes on the sale of the first property. It is named after section 1031 of the Internal Revenue Code (IRC).
- How does a 1031 exchange work?
In a 1031 exchange, the proceeds from the sale of the original property are held by a qualified intermediary (QI) and used to purchase the replacement property. To qualify for tax deferral, the replacement property must be of like-kind and the transaction must meet certain timing and identification requirements.
- What is an example of how a 1031 exchange works?
If an investor sold a commercial property for a $500,000 profit, and your capital gains tax rate is 20 percent, then that investor owes $100,000 on the sale of that property. However, if they choose to do a 1031 exchange, then that investor can just reinvest the $500,000 profit into another commercial property that costs the same or more than the one that just sold. That investor would then avoid paying taxes on it!
- Who is a qualified intermediary (QI)?
QIs can be banks, trust companies, attorneys, accountants, or other independent third-party companies that meet the IRS requirements. When selecting a QI, it’s important to do your research and choose a reputable company with experience facilitating 1031 exchanges. It’s important to note that the role of the QI is strictly limited to facilitating the exchange, and does not include providing investment advice or guidance. Investors should consult with their own tax and financial advisors to determine if a 1031 exchange is appropriate for their specific circumstances, and to evaluate the potential tax and investment benefits and risks.
- What are the benefits of a 1031 exchange?
The benefits of a 1031 exchange include tax deferral on the sale of investment property, the ability to reinvest the proceeds in another property, and the potential for increased cash flow and appreciation.
- What properties qualify for a 1031 exchange?
Any investment property held for business or investment purposes can qualify for a 1031 exchange. Examples include rental properties, commercial properties, and land held for investment purposes.
- Can I do a 1031 exchange for a vacation home?
No, a vacation home does not qualify for a 1031 exchange because it is not held for investment or business purposes.
- How long do I have to identify replacement property in a 1031 exchange?
Taxpayers have 45 days from the date of the sale of the original property to identify potential replacement properties. There are specific rules regarding the identification process, such as the three-property rule and the 200% rule.
- Can I use a 1031 exchange for a rental property?
Yes, rental properties can qualify for a 1031 exchange as long as they are held for investment purposes.
- What happens if I don’t reinvest all the proceeds from a 1031 exchange- can I do a partial 1031 exchange?
It is possible to do a partial 1031 exchange by using some of the proceeds from the sale of the original property to purchase a replacement property, and paying taxes on the remaining proceeds.
At SIG, we understand that 1031 exchanges can be a powerful tool for investors looking to increase wealth and save on taxes. With over 65% of our business involving working with 1031 exchange clients, we have a proven track record of helping our clients seamlessly navigate the process. Whether you’re new to the world of 1031 exchanges or looking for expert guidance on a complex transaction, our team of qualified intermediaries is here to help. Contact us today to learn more about how we can help you achieve your investment goals through the power of 1031 exchanges.