Now I have your attention! What I am going to talk about today is an IRC 1031 Tax Deferred Exchange. Used by most experienced real estate investors at some point in their investment cycle, it is a way to pay later (defer) taxes on real estate gains.
There are some guidelines to follow in order to take advantage of this process in your transaction. Basically, you need to buy for equal to or greater cost, use all the cash proceeds you receive from the property you sold, and finance at least the amount you had as a loan on the old property. The other main factor is to make sure it is a “Like-Kind” property.
It is also important to not have those proceeds available to you when your property sells and you re-invest in the new property. The sold property is called the relinquished property, and the acquired property is referred to as the replacement property. In order to satisfy that requirement, the transaction for selling your relinquished property is assigned to an Accommodator. There are many to choose from, and of course, I have my favorites.
It is during the sale escrow of the relinquished property that you choose your accommodator, and then the process begins with them. You will be given the timelines for “Identifying” your replacement property. That is 45 days from the date of closing of the relinquished property. You will have to choose (identify) properties within this time frame using one of the 3 methods described by them. You have a total of 180 days after the close of the relinquished property to complete the acquisition of your replacement property.
There are definitely more details that go into this process. I can also speak from personal experience that it is a wonderful way for an active investor to avoid the need for paying taxes on a sale which dilutes the available capital for investment. I am certainly not a tax advisor or tax attorney, and I always recommend that my customers consult with their chosen professional prior to accepting any sale on a relinquished property where a 1031 exchange may be a perfect fit.
I have been an active investor in real estate utilizing this valuable tool several times. I have also had the privilege of assisting many investors over the years, and have witnessed the tremendous advantage this has created for their investment portfolio. There is also a way of “winding down” your investment properties and taking advantage of other available processes.
I would love the opportunity to discuss how 1031 may be a good fit for your investment property. Additionally, if you want to “cash out” of your 1031 property, we can discuss that process too.
This is Ken Follis with Kim Carlson and Ken Follis Real Estate Group. I can be reached at 760-803-6235