Here’s a rundown of the 1031 exchange and why it’s great for investors.
Let’s imagine you have an investment property you want to sell, be it a rental or a fix-and-flip. You’re looking for a way to somehow exchange it for another investment property so you don’t have to pay capital gains taxes (since you made a ton of money from the rental over time). The 1031 exchange allows you to do exactly that.
When you close on an investment property, the title company takes your proceeds and transfers it to another entity (for my recent exchange process, I chose First Bank, a local institution) who holds that chunk of change in an escrow account for a fee. In my case, it was roughly $700 to have it held for 45 days, but the entire length of the holding period for a 1031 is 180 days. What does that mean?
So, the 1031 company holds your proceeds until you find another investment property, which has to be a like-kind property. If, for example, you sell your investment property for $475,000, you’d have to locate a property that costs $475,000 or more, and you have 45 days to find it. Once you earmark a property to purchase, you then have a total of 180 days to close on it.
A 1031 exchange is a great financial vehicle to avoid having to drop hundreds of thousands of dollars in taxes. In my case, I was facing $60,000 in taxes; by not paying that now, I have more buying power to secure a bigger property with a greater cash flow (stay tuned, because we’re looking at a multi-unit in either Kansas or Colorado).
As always, if you have questions about the 1031 exchange or have any other real estate needs, don’t hesitate to reach out to me. I’m here to help.