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1031 tax deferred exchange

Are you debating if you should do a 1031 tax deferred exchange?

A 1031 exchange is a way that the Internal Revenue Code allows taxpayers to sell a property while deferring capital gains tax if they purchase a like kind property.

Here are the 4 reasons people do 1031 tax deferred exchanges:

  1. To delay/avoid capital gains tax (obviously!)
  2. Exchange a property to an income producing property, like vacant land to a condo or house.
  3. Reinvest in another property that in the future would not show as high of a gain.
  4. To diversify ones properties.

 

Doing a 1031 tax deferred exchange is a federal government exchange so both properties need to be in the United States for this exchange to work, also the exchange needs to be handled by a Qualified Intermediary (QI). Like Old Republic Exchange is creditable and who I would recommend to work with in Hawaii.

The QI works with the escrow company and Realtor, the steps are still the same a person would still go through their Realtor to purchase/sell their properties.

Other fun facts about 1031 exchanges:

*This is general information, I advise to check with an accountant/CPA for anything specific.

  • A 1031 exchange purchase is supposed to be for investment and business purposes. Julie Bratton with Old Republic exchange company recommends having at least 1 year of rental income (as proof incase of an audit.)
  • A 1031 exchange is not supposed to be used as a Hold to flip properties.
  • 3 property rule – This is most common to list the 3 properties someone will possibly purchase with no value limit.
  • 200 percent rule – There is no limit to how many properties are listed as a potential purchase as long as the value does not exceed over 200% of the property being sold. Example: If selling a property worth $500k someone could then by 5 different condos at a value of $100k.
  • An exchange has to be done with real property, no exchanging for cars or boats etc.
  • There are certain restrictions if purchasing a property while doing a 1031 exchange from immediate family. Be sure to let your QI know if you plan on purchasing a property from family.
  • There are other exchanges like a reverse exchange, simultaneous exchange, or improvement exchange.
  • The most common 1031 exchange done which is in this blog is called a delayed exchange.

 

Something to keep in mind is that a 1031 is allowable through the Internal Revenue Service (IRS). Recently while assisting a client doing a 1031 exchange something came up that was a state exception. Make sure any changes are approved by the 1031 exchange company and IRS because it is through the federal government and not the state.

Are you thinking about selling your property to do a 1031 tax deferred exchange?

Get a free estimate of how much your Kauai property may be worth through this short form! Click Here. 

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