As a real estate investor, it's good news to know that 44.1 million American households are renters. You're an investor to make money. So, knowing that renters spend around $485 billion in rent each year is likely encouraging.
Real estate investing involves upgrading properties, buying and selling, and building your property portfolio. Of course, as an investor, you also know you need to be mindful of every sale and the tax implications that come with it.
It's for this reason the IRS came up with 1031 exchanges, sometimes called like-kind exchanges, and the 1031 exchange requirements.
Read on to learn more about 1031 exchange requirements to make a like-kind exchange and build your Columbus, GA real estate portfolio.
What Is a 1031 Exchange?
A 1031 exchange exists as a way for a real estate investor to delay paying capital gains taxes on a sold property by purchasing a new property in its place.
The original idea was that it would be a like-kind exchange, where a property owner basically swapped or exchanged properties with another owner. The reality of two owners agreeing to this kind of exchange is unlikely.
The IRS developed a list of rules that would allow you to sell one property, then within a set amount of time purchase a new one in its place. The goal is that the seller/buyer delays paying capital gains tax on the property that was sold.
Why Execute a 1031 Exchange for Investment Property
In real estate investing, the goal is to allow the property to grow in value. Often if it's an investment property, you'd likely hire a property management company that would rent out your property.
Your property makes money in two ways: first through growth in value over time and second through rental revenues.
As an investor who may buy and sell properties over time, you have to be cautious of losing those gains you've made through capital gains taxes when you make a sale.
A 1031 exchange done correctly can help you to delay having to pay tax on the capital gains you might see when you sell a property. Of course, it means you have to follow the very strict rules involved in a 1031 exchange.
Rules for a 1031 Exchange
Usually, a 1031 exchange actually involves a three-party exchange. It goes something like this.
You sell a property and the money from the sale must go to a Qualified Intermediary who holds onto the cash from the “sale” of your property.
The Qualified Intermediary then uses the money from the sale to buy a new property on your behalf.
Some of the rules include:
- Follow the like-kind property rule
- Can only be done for business or investment properties, not personal property
- New property must be of equal or greater value
- Identify new property options within the 45-day window
- Purchase new property from those choices within the 180-day window
The rules for a 1031 exchange are very specific and strict. If you hope to participate in a 1031 exchange, it's important you consult someone who understands these rules.
Otherwise, you lose the advantage of not paying the capital gains taxes on the sold property.
Know the 1031 Exchange Requirements to Upgrade Your Real Estate Portfolio
Follow the 1031 exchange requirements to build your property portfolio and avoid paying the capital gains taxes on the sale of the property.
Once you have the property purchased, you'll need a rental property management company to help you with the property. We are a property management company in Columbus, GA ready to manage your investment properties.
Contact us today to learn more about our management services.