Real Estate Blog

One of the bits of lingo you'll see tossed around in real estate investing is "1031 exchange." This is one of those topics that is as complicated as you let it be. Smart investors -- which is what we all try to be -- have smart accountants. If you don't have one of those guys? Go find one. That said. Here are the basics.

A "1031 exchange" is a federal tax designation. (Yeah, I know makes my eyes roll back in my head, too.) Essentially it allows you, the investor, to sell Property A and buy Property B without losing money to a capital gains tax. Normally, you'd be looking at 15%   loss on capital gains, so the exchange lets you hold on to more money to keep your investment (aka property) portfolio afloat.

The requirements to qualify for a 1031 exchange are:

- The total price you pay for Property B (which has to be a "like kind property") must be equal to or greater than the net sales prices of Property A.

- As per the Federation of Exchange Accommodators, all the equity from the sale of Property A must be used to buy Property B.

- The properties in question must be used for an investment or business purpose.

- An "identification period" is necessary, which is a 45-day period between the sale of Property A and the identification of Property B. (An actual transaction is not required.)

- The "exchange period" is 180 days from the sale of Property A to the purchase of Property B.

To put it as simply as possible, a 1031 exchange lets you put 100 percent of your sales income right back into your investment portfolio. Nothing is lost on the sale of Property A when you buy Property B, so in the end, your portfolio is stronger.

Never, ever move forward with something like this until you or the people with whom you consult -- an experienced REALTOR® and a good tax attorney and/or accountant -- have explained the specific terms of the 1031 Exchange process to you under the U.S. Tax Code. This can be a tremendously beneficial process for the smart investor if you are in the right financial position to leverage those benefits.

We'll discuss1031 exchanges more in the future, but these are the basics to put the idea in the back of your mind as one of your potential investment tools. Really smart investors never stop learning and never stop asking questions. Feel free to use the comments to explore this idea further and everyone have a safe and happy Labor Day weekend!