3 Things To Know About The Real Estate 1031 Tax Deferred Exchange

Posted on: 7 January 2021

One of the nice things about owning real estate is that it will typically increase in value over the years, leading to a nice profit when you eventually go to sell the property. However, that increase in property value is subject to capital gains taxes, which you likely want to avoid paying if at all possible. That is where the 1031 tax-deferred exchange comes into play since it is a way to allow you to defer paying those taxes until a later date. Here are a few things you need to know about this rule when it comes to selling and purchasing real estate. 

You Have To Work Within Time Limits

There are a few time limits that you need to work within if you are trying to defer your capital gains taxes with a 1031 exchange. The first time limit you need to know starts from the date that you sell your main property that increased in value, and you'll have 45 days to identify the property that you want to purchase next. Next, you'll have 180 days to close on the new property. If you do not meet these deadlines from the date that you sell your property, you will end up paying capital gains taxes.

Keep in mind that these dates are non-negotiable. If your financing for the new property falls through or there are delays that cause the closing to happen past 180 days, then you will be hit with a tax bill that must be paid on those capital gains earnings.

You Can Identify Multiple Properties

If you end up selling a property that makes a huge profit, you can actually use those earnings to buy multiple properties. You can actually identify three potential new properties to purchase, which is great for those looking to buy an investment property and maximize their earnings. However, the properties that you purchase cannot exceed a total of 200% of the value of the property you are selling. You don't have to purchase all the properties you identify but must purchase at least one. 

You Need A Qualified Intermediary

The key to deferring taxes on your real estate sale is using a qualified intermediary (Q.I.) that assists with the sale of your home. It works very similarly to a normal real estate purchase, except that the purchases go through a qualified intermediary. This ensures that you do not receive the funds from the sale of the home since it technically goes through the Q.I., which means that you do not have to pay the taxes on them because the money never reached your personal bank account.

Talk to a real estate agent to learn more about 1031 exchanges.