A 1031 exchange, named after Section 1031 of the Internal Revenue Code, is a tax strategy that allows real estate investors to defer paying capital gains taxes on the sale of an investment property by reinvesting the proceeds into a new, like-kind property. Essentially, the investor can defer the tax liability as long as the new property is of equal or greater value, and the exchange adheres to specific timelines and requirements set by the IRS. This process enables investors to continue growing their real estate portfolio, increase cashflow and build equity, without the immediate financial burden of capital gains taxes.
Yes, but the capital gains tax of your sale will be “deferred” until a future date, depending long term on additional future sales or death of investor.
With a 1031 exchange, you can defer your capital gains taxes indefinitely as long as you continue to reinvest in like-kind properties through subsequent 1031 exchanges. The deferral continues if you follow the IRS requirements for each exchange, including timelines and proper identification of replacement properties. However, the deferral will end when you eventually sell a property without using a 1031 exchange, if you fail to meet the exchange requirements or at death of the investor. If the investor passes, there is a step-up in cost basis which can be found in the following question.
When you die, your heirs usually receive a “step-up” in the basis of the inherited property. This means the property's value is adjusted to its fair market value at the time of your death. The stepped-up basis eliminates the need for your heirs to pay capital gains taxes on the appreciation that occurred during your lifetime.
Yes, you can use a 1031 exchange to go from a residential property to a commercial property and vice versa, as long as both properties are considered "like-kind" under IRS rules. The term "like-kind" is broadly defined, meaning that the properties must be used for investment or business purposes, but they don't have to be identical in type or use.
Yes, if you have an existing loan on your relinquished property, you have three options:
1. Use a 1031 exchange to sell the property and pay off the remaining debt.
2. Replace the debt by taking on an equal or greater loan on the replacement property to avoid potential mortgage relief taxation.
3. Leave the debt on the relinquished property and when you close escrow that debt will be paid off. When acquiring the new property, you can replace the loan amount with cash.
Reach out for more about potential financing options or considerations.
Single family rental properties need to be rented for 24 months if it was once used as your primary residence. If it was always bought for investment purposes we can assist you in planning a 1031 solution for your property.
A single tenant net lease (NNN) property is a type of real estate investment where a single tenant occupies the property and is responsible for paying not only the base rent, but all of the property’s operating expenses. These expenses typically include property taxes, insurance, and maintenance costs, shifting the financial burden of operations from the landlord to the tenant. This arrangement provides the landlord with a more predictable and stable income stream, as the tenant assumes the majority of the property’s operating costs and maintenance obligations. Single tenant NNN properties are often sought after by investors for their relatively low management responsibilities stable returns, and credit worthiness of the tenant.
