Know the Rules, Maximize your Exchange
1031 Tax Exchange for the Modern Investor: Part 2
A note: As the CEO of The Lee Arnold System of Real Estate, I do not often wear my “buy and hold” hat. I rarely recommend this as an investment option until you’ve reached a certain level in my Circle of Wealth. However, I still recommend this service for those who are buying and selling rentals.
And since Cogo Capital® doesn’t just offer quick turnaround, excellent terms, and millions to lend to investors, our loan officers would be happy to talk to you about your upcoming transitions.
If you’re ready to learn more about the CIRCLE OF WEALTH, click here.
If you didn’t read last week’s post (PART 1), you can find it by
If you’re ready to understand the rules of your 1031 Tax Exchange, let’s jump right in!
WHAT ARE THE RULES?
Rule #1: Like-Kind Property
You must find a like-kind property.
For the exchange to happen, regardless of which method you use, you must acquire a like-kind property. Fortunately, this a very broad term that includes properties of the same nature by difference qualities. Although you can’t exchange a 4-plex for a barn full of ranching equipment (because they aren’t like-kind assets), you CAN exchange a rental for a rental.
Both the original and the replacement property must be in the U.S.
Exception to the Rule: You can exchange one property for two like-kind properties!
Rule #2: No Primary Residence
Unfortunately, you cannot exchange primary residences to receive a 1031 exchange. You can only exchange investment and/or business properties.
If you moved from California to Washington, you could not exchange your primary residence in California for another in Washington.
If you’re getting married, and move into the home of your partner, you couldn’t trade your primary residence for a vacation property.
However, if you own a single-family rental in any state, you could exchange it for a commercial rental in that state or any other.
Rule #3: Equal or Greater Value
It is best to assure the newly acquired property is of equal or greater value. It isn’t impossible to exchange your property a like-kind property that has a lessor value, but you the difference is called a “Boot,” and you are subject to tax on it. In order to completely avoid paying any taxes the net market value and equity of the property purchased must be the same as, or greater than the property sold.
Again, you can do a partial exchange, but be aware that you won’t be 100% tax exempt. To talk through your options, find your local 1031 tax exchange specialist.
Rule #4: Same Tax Payer
Although there are exceptions to the rule (when it comes to LLCs and SMLLCs, there tend to be exceptions), generally speaking, a 1031 must be done under the same tax payer’s name. This means you cannot sell a property under your name and have another person purchase the new one. I mean, this makes sense to me, but it needs to be mentioned because some people have tried it.
The title holder for Property A must be the title holder for Property B.
If you believe these waters are muddy in your situation and would like clarification, contact your local 1031 expert.
Rule #5: 45 Days to Identify
From the time you close on your exchanged property, you have 45 days to identify the new property. In fact, you can set it up to have several properties to identify in case one or more falls through. But remember, they must be like-kind. Finding just one might be difficult, so exercise caution and have an idea of the like-kind property you want to exchange your first for before you close.
(The 200% rule exists for situations like this; where you can identify up to four properties so long as the combined value doesn’t exceed 200% of the exchanged property.)
Rule #6: 180 Day Purchase Window
Even after you’ve identified your property, you aren’t off the hook. You have 180 days from the sale of the exchanged property to close on the new one. It’s necessary that the replacement property be received and the exchange completed no later than 180 days after the sale of the exchanged property OR the due date of the income tax return (with extensions) for the tax year in which the relinquished property was sold, whichever is earlier.
There are rules associated with your exchange, yes. And you don’t want to take ruin your opportunity to save on taxes by disregarding the rules. But if you have a creative need, there is a creative solution. Even if you don’t think your current situation will qualify for a 1031, it doesn’t hurt to speak with a specialist to discover your options.
There are plenty of strategies to avoid paying capital gains on the sales of investment properties, but only your facilitators can advise you best. So, get in touch with your local tax attorney, CPA, and loan officer to discover the best solution for you.
You can comply with the rules while finding creative solutions that fit your goals and market. Don’t lose money on selling investment properties without taking a hard look at your tax options.
Whether you’re exchanging like-kind investment properties or looking to purchase investment properties to fix and flip, Cogo Capital can give you options.
You have the ability to create active and passive income in all areas of real estate investing. Even if you don’t have a lot to start with, Cogo Capital can help you find a loan that works for you and the properties you get under contract.
All you need is a solid education to start your journey off right.
Even if you’re a seasoned investor, a 1031 tax exchange can be complicated. But private money doesn’t have to be. Give us a call to discuss your options today, and we’ll gladly find a loan options that works for you.
Remember, you can do anything you want to do. There are creative solutions to all sorts of investing situations, so don’t limit yourself based on your current knowledge. Instead, get a team of people behind you to guide you through the right paths toward your success.
I believe in you.
To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing
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