The Benefits & Tips of 1031
Investing in real estate properties comes with a lot of obligations and a considerable amount of continuous work involved. Most of all, investing in real estate comes with a lot of debt burden that can sometimes make it difficult to turn a profit from a property investment. However, what if you could lessen some of that cost by eliminating the tax burden associated with investment properties?
What is a 1031 Exchange?
According to section 1031 of the United States IRS Code, a 1031 exchange allows the individual tax payer exemption authority that excludes them from accruing income based tax liabilities attributed to both the Federal Government and local state tax laws. This 1031 exchange policy applies to transactions that fall under certain forms of property exchange. It allows the investor to defer the tax liability by re-investing into another property that has similarities in equal value and purpose.
What this means, is that if you are an investor focusing on commercial real estate investments such as corner lots for malls that you can lease to business owners. You can choose to sell this commercial real estate property and purchase another of equal value or greater and for equal purpose. The profits made from the investment property that was sold will then become tax deferred as long as the profits are reinvested into another commercial real estate investment. Remember that this program is available only to owners of investment properties and commercial property.
What does equal purpose mean?
This is referring to the type of property and how it is used by the tenants. For example, you cannot invest in a commercial property, then sell it and use the proceeds to reinvest them into a residential property that is a single residence or even a family home. The purpose of this program is to incentivize investors on property development. Remember that when a new investor purchase investment real estate, they tend to spend money on rehabilitation projects such as rehabilitating the structure of the property, exterior appearance, curb appeals, paint, plumbing and much more!
From a political point of view when this type of incentive is implemented in larger numbers it promotes jobs and local growth for the communities involved. It prevents empty homes from becoming a sore sights in the neighborhood and helps increase property values when empty homes are improved and rented or sold.
Are stocks or bonds considered to be a 1031 exchange?
Absolutely not, in a 1031 exchange program, stock, bond and any other related personal or business property will not be considered under the IRS 1031 Code. What about properties overseas? These types of real estate properties are adamantly excluded from this exception. The IRS Code expressly states that the real estate property must fall within the 50 states in the Nation. It also makes some exceptions for properties in the Virgin Islands.
As a small business owner in the real estate market, are there any other benefits to me with a 1031?
Yes, small business owners getting into the buying and selling property market, may require some ideas and tricks of the trade that allow you to take advantage of this incentive. Using this kind of program with a HUD housing program that may be available for improvements of distressed properties can help you increase your gains and place you in a better position to invest in larger endeavors.
What if I can't find another property to exchange that is in "LIKE KIND" condition? Is there a waiting period?
If you can’t find the right investment property to execute the 1031 exchange at the moment your buyer closes the purchase of your property, you don’t have to worry. There is still a period of exception after the closing of your sale. Typically, this is about a 90 day waiting period from the moment you accepted the offer from your buyer.
Keep in mind that 90 days may sound like ample time but during the transfer of 1031 exchange this can go by very quickly. Between the paperwork, legal matters, appraisals, inspections, CPA and more, this time can pass you by so stay on the hunt for that “LIKE KIND” investment property and make the offer.