What is a 1031 Exchange?
A 1031 Exchange, named after Section 1031 of the IRS tax code, allows investors to sell an investment property and use the proceeds to purchase another investment property without paying capital gains taxes immediately. This deferral can save investors a significant amount of money.
The Four Ways to Do a 1031 Exchange
- Delayed Exchange:
- Sell your property first, then buy a new one.
- Use a Qualified Intermediary (QI) to manage the process.
- Submit a list of potential replacement properties within 45 days.
- Complete the purchase within 180 days.
- Reverse Exchange:
- Buy the new property first, then sell your current one.
- Use an Exchange Accommodation Titleholder (EAT) for a loan to buy the new property.
- Same 45-day and 180-day timelines apply.
- Simultaneous Exchange:
- Buy and sell properties at the same time.
- Use a QI to ensure a safe and compliant exchange.
- Improvement Exchange:
- Use proceeds from the sale to improve the new property.
- Complete improvements within the 180-day timeframe.
Important Points
- No Limit: You can do multiple 1031 Exchanges per year.
- Same Taxpayer: The person selling the property must be the same one buying the new property.
- Flexible Property Types: Exchange various types of real estate, like commercial for residential, as long as they are like-kind properties.
- Inter-Island and Mainland Exchanges: You can exchange properties between Hawaii and the mainland or within the islands.
Final Tips
- Consult Experts: Always work with a 1031 Exchange facilitator, attorney, or tax advisor to ensure everything is done correctly.
- Understand the Rules: Knowing the timelines and requirements is crucial for a successful exchange.
By using a 1031 Exchange, investors can defer taxes and continue to grow their real estate investments. It’s a valuable tool for long-term financial success.
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