In a real estate related 1031 Exchange you can sell any type of real estate investment property and buy any other type of real estate investment property. This exchange allows anyone to legally roll over money from the first sale into a new purchase while deferring paying taxes. In this series I’ll summarize five 1031 Exchange rules you should know.
Held for Investment
Property that’s held for investment or used in a trade or business qualifies for a 1031 exchange. The term held of investment means that the intention is to hold the property for future appreciation or to produce income. Performing a quick flip or resell automatically disqualifies the property for 1031 exchange purposes. As a rule, make sure the both old and new properties have been held as an investment for a least 366 days.
When the old property sells, you’ll have a 45-day window to present your accommodator with a list of new properties you want to purchase. The list must adhere to with the following rules;
- Up to 3 properties regardless of their market value.
- The cumulative total of the market value ca not exceed 200% of the property value that’s being sold.
- The cumulative total of the market values is at least 95% of the property value that’s being sold.
Note: The list must be sent on or before the 45th day regardless of holidays or weekend. If not, the 1031 Exchange cannot proceed and the capital gains tax must be paid to the IRS.
After closing on the sale of the old property, you’ll have 180 days to close of the new one. One of the properties identified on the list you created and gave to your accommodator must be purchased. In the event you do not close on the new property on or before the 180 day mark the exchange process will become void and the capital gains tax will have to be paid.
Money and Ownership
Understand, by federal tax law, all 1031 Exchanges are required to use an independent third-party service, an accommodator, to handle the money involved after the sale of the first property and the purchase of the new property. You are not to receive or have access to those funds. Additionally, the old property and the new property’s ownership must be the same. The same name of entity on the tax return of the owner who owned the first property has to own the new property too. You can’t sell a property that is in your personal name and then buy the new property in your LLC’s name.
Reinvest It All
If you want to avoid paying taxes make sure the selling price of the new property is equal to or greater than the net selling price (selling price – closing cost = net selling price) of the old property. Furthermore, all the cash received from the sale of the first property must be reinvested into the second property. Any monies taken by you post sale is taxable in the eyes of the IRS, so don’t do it. Doing so, would mean you actually sold something. Make sure you reinvest every last penny so you are not taxed.
Syndication Capital is a private commercial multifamily real estate acquisitions and asset management firm focused on buying quality value-add apartment properties in low cost growth markets for sustainable income and equity success.
If you are interested in learning more about creating turnkey passive income and generational wealth through multifamily apartment investing? Visit www.syndicationcapital.net for more information, resources, frequently asked investor questions and our free e-book, “How to Passively Invest In Multifamily Apartment Syndications”.