Bob Nelson, Eugene commercial real estate broker, Pacwest Real Estate Investments, and Marcia Edwards, Eugene residential broker, Windermere Real Estate, take a look at the rules of the 1031 exchange, and the added value that it can bring to your real estate investing.
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The 1031 exchange is a core piece of real estate investment wealth building. At first glance the process may be overwhelming, but it pays extraordinary dividends when a real estate investor takes the time to understand it.
Simplified, the parts to the 1031 exchange are owning a property that qualifies for a 1031 exchange and acquiring a new property that qualifies for a 1031 exchange. But there are important rules governing a 1031 exchange.
The Rules of a 1031 Exchange
The first rule of a 1031 exchange is both properties or lots will have to be held for investment purposes or as a productive asset in your trader business. Real property for real property only. This is referred to as like-for-like, and in essence you will be trading your similar property for the newly acquired one.
The second rule looks at the value of these two properties that you’ll be exchanging. The property that you’re selling will be the measuring point for what you’re acquiring, and the new property must be of equal or greater value than that of the original property. You will not have any money remaining from the sale of the relinquished property in a 1031 exchange. This is the even-or-up rule.
And with the fulfilling of the second rule, you will have a fully tax-deferred exchange for your assets. But if you’re looking to downsize, you can also consider a partially tax-deferred exchange. A partially tax-deferred exchange allows you to pull some value out of the deal and exchange your property for one of lesser value, with the cost that you will be paying a capital gains tax on the funds that you did not reinvest in that new property. However, the value of that second property will still be fully tax-deferred through the exchange.
EXPERT TIP
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
Timing is key when working with a 1031 exchange. It’s the technical third rule of the 1031 exchange- the identification rule. From the moment that you sell your property, you will have a mere 45 days to identify a limited number of properties that you would be willing to acquire through the exchange. Because of this, it is crucial to know what you’re working with, to understand the 1031 exchange and the market that you’re purchasing in, early on in the process.
If you’re new to the 1031 exchange, reach out to a knowledgeable expert to help guide you through the process. The extra cash you save yourself will feel worth it.
The Basics of the 1031 Exchange is from Bob Nelson and Marcia Edwards on the “Real Estate Today” Eugene, Oregon, radio show, which airs at 5:30pm daily on KPNW.