Have you heard about the 1031 exchange and how it can benefit you as a real estate investor?
It’s not a permanent benefit for real estate owners, but Congress continues to keep it available for property owners who are interested in selling an asset, and then reinvesting what is earned into another real estate purchase, rather than walking away with the profit.
This is a great tool for upgrading the real estate investments you currently have in your portfolio. Let’s take a look at how you can make the 1031 exchange work for you.
How Does the 1031 Exchange Work?
A 1031 exchange occurs when a property owner sells a property, then identifies and purchases another property in order to avoid capital gains taxes. Keep in mind this is only a deferral. The taxes aren’t forgiven. But, it will be less of a burden in the future because time is money in real estate investing.
These are your steps towards benefitting from a 1031 exchange:
- Sell and Exchange a Like Property
Sell a property that no longer serves you and purchase a like property. This does not mean the properties have to be similar. You can sell a single-family home and buy two condos. You can sell a multi-family building and buy a single-family home. It has to be real estate for real estate, and both the sold property and the new property have to be income-producing investments.
- Pay Attention to Deadlines
You have 45 days from the close of escrow on your sold property to identify the like property or the other investment you’ll purchase. Then, you have 180 days after you sell your property to close on your new property.
- Utilize an Intermediary
You are required to utilize an intermediary when you’re doing a 1031 exchange. The professional you work with can help you with keeping the money on the sold property in escrow. They can manage the IRS paperwork that comes with deferred taxes.
How Does the 1031 Exchange Help Tampa Real Estate Investors?
Deferring taxes is a win on its own. But, there are more ways the 1031 exchange can help you.
First, it can help you let go of a property that’s perhaps costing you too much or not bringing in the income you had hoped it would. You can sell a property that was recently identified as being in a flood zone. You can buy newer properties that have lower insurance and maintenance costs.
This type of transaction will help you diversify your portfolio. If all of your investments are condos in the same neighborhood, use the 1031 exchange to branch out into different neighborhoods or property types. It reduces your risk and opens you up to stronger returns.
If you’re from out of state, you can really leverage the lower property costs in Florida with a 1031 exchange. Selling an investment property in California, for example, will give you a lot of opportunity in real estate markets on Florida’s Gulf Coast.
We’re here to help you maximize what you earn on your investment properties, whether they’re current assets you own or potential investments you’re considering. Let’s talk about your investment goals. Contact our team at Hoffman Realty.