Drew Monaghan, president of The Private Exchange Group, Inc., put this piece together for me. He always emphasizes that 1031 Exchanges are not ONLY for commercial real estate. If you own a home that you do not live in, we should talk. -Stefan
The 1031 Exchange is a section of the Internal Revenue Code (IRC). It allows you to indefinitely defer your taxes on the capital gains (or “profit”) of the real estate sale, by “exchanging” qualified properties for others of the same value and investment or business usage.
If you’re like most property owners, you either don’t know about 1031 exchanges or have the wrong ideas about them. This a real problem with many investors. If you don’t know enough or have the wrong ideas about a 1031 exchange, you are probably missing the hidden opportunities in plain sight.
The simple fact is this: if you don’t do them often, you probably should consult a professional who does.
In this article, we’ll take a look at:
1. The Concept
2. How Do You Qualify
3. How Do You Find the Hidden Opportunities
4. How Do You Take Advantage of It
1. What is The Concept?
Here’s a simple way of thinking about the 1031 exchange: it’s like playing Monopoly® to defer your capital gains taxes!
Think about the goal of Monopoly®; to build wealth by adding more properties that produce more income.
For example, if you take the 4 “Green Houses” you own on “New York Avenue” and “exchange” them for the “Red Hotel” you will increase your income from a low of $16 to a high of $1,000 every time someone lands on your property. Now imagine doing that with real property!!
In the real world, you would have to sell each of your 4 houses and pay taxes on the profit of each sale before you could combine the money to buy the larger property. This is known as Capital Gains taxation.
Taxes will reduce the amount of money you have to buy the larger property, thus reducing the amount of your net. In the Monopoly® analogy, the 4 houses combined are of equal value to the hotel and all are used for investment (collecting rent).
By utilizing a 1031 Exchange in your Real Estate dealings you will combine the proceeds of your sales for more purchases without paying taxes on gains now.
2. How Do You Qualify?
All U.S. taxpayers qualify. Foreign Nationals may qualify if they take certain steps well in advance.
Any of your real estate properties qualify if you use them for business or investment. If you are “flipping” properties or using them personally beyond the requirements for investment you have to pay your taxes from the sale as they are not qualified for a 1031 Exchange.
3. How Do You Find the Hidden Opportunities?
It’s simple. Take a look at your portfolio. Ask yourself some of the following questions:
a. Are your real estate holdings performing to your standards?
b. Do you want to get more return out of them?
c. Would you like to move them to different areas, types, sizes?
d. Would you like to diversify or consolidate?
e. Do you want to use leverage to increase the income of your assets?
f. Do you own land and would like to exchange it for something that produces a monthly income?
These are just some suggestions to get the conversation going. The 1031 Exchange can allow you to make changes to your real estate investment portfolio while helping to preserve the equity you’ve built.
4. How Can I Take Advantage of a 1031 Exchange?
After you analyze your portfolio, you may find the need to make some changes. If so, here are some steps to consider:
a. Contact your Realtor
b. Work with your Realtor to engage an Intermediary.
c. Have a strategy meeting. You need to have a clear understanding of the 1031 rules and
process relative to your goals.
d. Decide what properties you would like to exchange into (buy).
e. Hire the Intermediary.
f. Put your properties to be exchanged (sold) on the market
If you are not actively utilizing 1031 exchanges, we HIGHLY recommend you start from the beginning and let your Realtor and an Intermediary walk you through the rules and process relative to YOUR situation.
The 15 minute call/meeting will be well worth the time. Please remember that this is simple until it’s not. Let me help you identify YOUR hidden opportunities and maximize the value of your real estate investment portfolio.
Please contact me directly to discuss your portfolio or to set up a call with Drew!