The 1031 Exchange – A Golden Opportunity
As a Realtor and Investor, I have been involved in several 1031 exchanges. From my own experience, I have learned that as you begin to understand the process, you find that it has even greater potential than you once thought. A 1031 exchange is an exchange of what the government terms "like property" for "like property." It is used mostly by those who purchase rental homes, flip properties or properties used strictly for investment. This includes land.
As a Realtor and Investor, I have been involved in several 1031 exchanges. From my own experience, I have learned that as you begin to understand the process, you find that it has even greater potential than you once thought. A 1031 exchange is an exchange of what the government terms "like property" for "like property." It is used mostly by those who purchase rental homes, flip properties or properties used strictly for investment. This includes land.
If one owns a single family home, for instance, and it is his primary residence, he can sell the home without a tax liability, so an exchange would be useless to him. However, if one owns a single family rental home, or desires to flip a fixer-upper, he may want to defer his tax liability. In this case, he can trade that home for another single family home without paying taxes for that transaction by doing a 1031 exchange. He may then exchange that new property for a third home, and likewise will not pay taxes on the new sale. He could conceivably continue to do these exchanges until death in which case his heirs would inherit the final exchange home, free of all taxes, save death taxes if any.
You are probably wondering what happens if our 1031 exchanger doesn't find a home that someone is willing to exchange. Well, the government has thought of that probability and built a solution into the system. Understandably in most transactions, the monetary value will not be equal either, so there will always be a money transaction. That is no problem for a 1031 exchanger because all monies are handled only by the exchange company. Here is a brief scenario to explain what could happen:
A Seller wants to sells property "A" and wishes to exchange that property for a new one "B." In the sales contract, he places specific wording to alert all parties that he intends to exchange, and then hires the 1031 exchange company to receive the profit that he has made on the sale of property "A." Escrow is instructed, via the wording in the contract, to send the monies directly to the exchange company. If the Seller handles the money, he cannot do an exchange. Once the sale closes, he then has 45 days to identify one or more properties that he is interested in, and has 180 days to close on one of the newly selected properties.
The trick to 1031 exchanges is to never assume. One of the more unusual deals that I have personally handled dealt with land to homes and vice versa. On the surface, these two do not appear to be like properties. However, the government has their own set of definitions outside of the realm of Webster's Dictionary, which in some ways, can help the savvy investor.
One of my clients exchanged a rental home for two pieces of land. One was going to be used for resale and the other was going to be developed into a primary residence. Frankly, I thought, at first that it couldn't be done, however, Uncle Sam ruled that if they held the land for two years, they could then use the one parcel as a building site for their primary residence. As you will remember, primary residences carry no tax burden upon the sale of said property. The other was one piece of land for four rental homes. In that deal, the 1031 exchange was a versatile and profitable tool for the investor. Suffice to say that one must investigate the 1031 Exchange Company to make sure they are reputable. When done properly, it makes investing far more profitable.
