1031 Real Estate Exchange

Get the Understanding You Need to Reap the Benefits of a 1031 Real Estate Exchange

If you work in the area of real estate, you’ve likely heard of a 1031 real estate exchange. However, fully understanding the concept is a much bigger challenge. As is the case with most legal terms, the assistance of a professional is needed in order to understand the concept fully.

A 1031 real estate exchange has the potential to save you tens of thousands of dollars, allowing you to increase the value of your portfolio exponentially, but only if you do it properly, which means seeking the help of a professional CPA with experience in this area.

Save big by making the right exchange

The basis of a 1031 real estate exchange is that you can sell one property and invest in a new one that will provide you with greater benefits and revenue. Normally, when selling a property, the seller is responsible for paying a wide range of taxes that include depreciation recapture, federal capital gains tax, state capital gains tax, and net investment income tax. Those taxes could cost tens of thousands of dollars, which leaves you with less money to invest in a new property.

With the help of a professional CPA, you can avoid paying all those taxes. A property valued at $400,000 could cost you up to $140,000, leaving you with only $399,860 to reinvest. Without paying those taxes, you’re able to use the entire $400,000 to invest in a new property.

Helping you understand a like-kind exchange

The basis of the 1031 real estate exchange is the fact that you’re making a like-kind exchange. This concept can be a bit unclear because it doesn’t necessarily mean you have to exchange a rental home for another rental home, for example. There is great flexibility in what the exchange can consist of.

A few examples of properties that can be exchanged include:

  • Single-family residences
  • Duplexes
  • Raw land for shopping centers
  • An office for apartments
  • Some personal property, like paintings

There are many things that don’t qualify, and certain items both can and cannot be exchanged, depending on your situation. That’s why it’s so important to hire a professional CPA who can ensure you get the full benefits of this unique law.

The entire 1031 real estate exchange process from start to finish

If you’re considering the possibility of selling a property in order to purchase a new one, you should hire a professional CPA from the very beginning. From start to finish, an accountant can help ensure you get the most out of the exchange so you can reinvest your money.

To learn more about a 1031 real estate exchange, or for help understanding whether or not it can be applied to your unique situation, give us a call. Our CPAs have worked with countless clients in this area, so you can feel confident knowing that we’ll see your 1031 real estate exchange to a successful end.


1031 real estate exchange FAQ

What kinds of things can’t be included in a 1031 real estate exchange?

There are many unexpected pieces of property that can be included in this type of exchange, but there are even more that cannot be included like:

  • Trade partnership shares
  • Notes, stocks, and bonds
  • Personal residences
  • Property in a foreign country

It’s important to check with a CPA before you make any decisions in order to ensure what you have in mind fits within the parameters of a 1031 real estate exchange.

Can flipping houses qualify for a 1031 real estate exchange?

House flipping has been a popular topic on television in recent years, and many people are getting into the business of flipping houses as a way to make money. Unfortunately, flipping houses won’t qualify for a 1031 real estate exchange.

When houses are flipped and sold quickly, they are considered stock in trade, and stocks cannot be included in a 1031 real estate exchange. The time period between acquiring the property and trading it is essential. If the trade is made too quickly, or if you trade many properties within a year, you may be considered a dealer, and that property or properties will be considered stock in trade.

Can I replace more than one property?

Trading a single property for another single property habitually may not enable you to utilize a 1031 real estate exchange, but that doesn’t mean you can’t replace more than one property in a year. The IRS allows the designation of three properties for replacement properties, so long as you eventually close on one of them. More properties can be designated within certain valuation tests. It’s important to consult with a CPA who has experience in this area to determine how many of your properties you can designate for replacement.

What happens if the new property I acquire is valued at less than the property I traded?

If your new property is valued at less than your previous property, the amount you pocket is considered a gain, or “boot”, and it will be taxed. The same is true if you have any cash left over after a sale for other reasons.

Can I swap a vacation home?

The loophole for vacation homes has tightened. As it stands right now, vacation homes can be exchanged if they’re being rented out. You do not have to rent out your vacation home 12 months out of the year in order to make an exchange. For example, you may use your vacation home for 6 months a year, rent it out for the remaining 6 months, and still make a trade. However, actually having tenants is key. If you say you have your vacation home up for rent, but never actually rent it out, it’s unlikely that you’ll be able to exchange it.