Let us break this down 

1. You buy a property (for rental income)

2. After some time the property value goes up 

3. You decide to sell the property 

4. Your property makes you some money #moneyface

5. You look and identify other investment properties within 45 days

6. You use the money to buy a new property within 135 days after that (Total 180)

7. Finally exchanging the two properties  - 

Now lets piece this together. You decide to buy an investment property and after some time the value of your property goes up, so you decide to sell the property for some quick cash profits. Now to defer your taxes, you must identify up to 3 potential investment properties within 45 days, and finally you exchange the money you made from the last sale for your new property, initiating a 1031 exchange, which defers your taxes! #savvyinvestor

1031 Exchanges are swaps of one “like” business or “like” investment for another, the word “like” is key as you can only swap property for property, or art for art. Most of the time this IRS tool is used for properties as it allows you to defer your capital gains tax, as many times as you want. Yes, you can keep exchanging year after year and won’t have to pay any capital gains tax on the exchange money until you decide to cash out. #moneysaved

How Does It Work 

You first have to have an investment property; this can be any place you own where you do not live, like a rental house. Now, you sell your property and after the sale of your property, you give the cash to a ‘middle man” (accommodator) who will hold the money for you and you have 45 days to identity 3 potential properties that you will buy, now after the original 45 days you have 135 days to buy one or more of those 3 properties that you intended to buy, essentially giving you 180 days from the sale of your other property to “exchange” it with a new property and defer your taxes! 

Rules 

• Must be for investment purposes 

• 45 Days to find 3 properties 

• 180 days to buy new property from last 

• Any cash you receive that was not used in exchange is taxable (boot)

Financial Planning 

With the set deadline to qualify for the 1031 exchange and the possible tax implications it is key to set a plan in motion before you even consider selling your property. You need to consider all your options. We here at Orca believe in swimming by your side to take on all the sharks in real estate and have an ecosystem of partners that have worked on 1031 exchanges before, reach out here to learn more.