| A “1031 exchange” is not a very catchy name, but it’s a functional one, as it represents the Internal Revenue Service code section 1031. This relatively unknown IRS code allows investment property owners to simply and legally defer federal and state capital gains taxes from the sale of investment property. This IRS code allows you to sell your investment property and delay the purchase of another like-kind property without a penalty. What is the catch? There are strict time limits on identifying and closing on the purchase of a replacement property. There are two critical numbers to remember. You have 45 days to identify a replacement property and 135 days to actually close on a replacement property after the close of escrow of your previous property. Your Excalibur consultant will provide you with specific details regarding those time limitations.
Now that we know what it is, what are some concrete reasons to consider an exchange?
- Tax Savings: A 1031 exchange allows you to preserve your hard-earned equity and in effect, reinvest the tax you owe as an interest-free, no-term loan from the government. You can’t beat that!
- Income: You can increase cash flow. An example of this would be exchanging out of bare land and into an income producing property.
- Leverage: The 1031 exchange helps you build wealth more rapidly by allowing you to use all of your equity rather than losing a portion through taxes.
Here are a couple of points to get you started. The IRS requires the use of a “disinterested” third party; companies known as qualified intermediaries, accommodators, or simply as exchange companies. An exchange company is the critical link to making a potentially confusing process go smoothly from beginning to end.
As with any service, there are many people who would like to have your business. Let me offer a little advice when it comes time for you to select an exchange company. Ask the following questions:
Personal Service – Who is going to work with me on my account? Is it the sales rep or someone I haven’t even met?
Experience – How many and what types of exchanges have you managed in the last year?
Expertise – Is this your main business focus or just a sideline?
Services – Do you provide in-house legal counsel? Do you provide replacement property assistance if I should need it?
I hope the information I have shared has provided some insight and direction for your potential real estate transactions and that you also are better armed to make the best decision possible when selecting an exchange company.
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A “1031 exchange” is not a very catchy name, but it’s a functional one, as it represents the Internal Revenue Service code section 1031. This relatively unknown IRS code allows investment property owners to simply and legally defer federal and state capital gains taxes from the sale of investment property. This IRS code allows you to sell your investment property and delay the purchase of another like-kind property without a penalty. What is the catch? There are strict time limits on identifying and closing on the purchase of a replacement property. There are two critical numbers to remember. You have 45 days to identify a replacement property and 135 days to actually close on a replacement property after the close of escrow of your previous property. Your Excalibur consultant will provide you with specific details regarding those time limitations.
