Have you ever heard of a 1031 Exchange? Prior to the “Tax Cuts and Jobs Act,” under particular circumstances lots of various types of properties could be exchanged in a 1031 exchange. . . oil wells, cows, cars, houses. . . you get the idea. Since passage of that piece of legislation – which I recently wrote about, put a cap on how much mortgage interest you can write off your income tax – you can only exchange “real property” such as land, office buildings, and investment properties such as commercial or residential lots and property.
So, what is a 1031 exchange? A 1031 exchange is a way to “sell” (actually trade) property and defer the tax consequences. This is based on the concept that you (the seller) will roll over any gains into the newly purchased property. This allows you to defer any tax consequence until you sell the newly acquired property. Of course, there are some rules. One of the rules is that you must be investing in a property that is of equal or greater value than the property you are selling (or trading) and the property must be considered a “like-kind” investment.
Of course, pursuing a “like-kind” investment is more complex than a traditional sale. This is because the tax code is complex, not because the transaction is complex. You will want to discuss any 1031 Exchange with your Tax Advisor to insure you meet all the stipulations. In essence, if your transactions are handled properly you gain the benefit of a ‘tax-free loan’ from the federal government equal to the amount of Capital Gains Tax that would be incurred on a traditional transaction. Not a trivial opportunity.
Numerous investment opportunities qualify – whether it is residential properties held for investment purposes, hotels, warehouses, condominiums, raw land, duplexes, or other “investment” real property, all can qualify. Keep in mind though, this is NOT treated as a sale. If you perform a “traditional” sale you will not qualify. This is an exchange.
The bottom line, if the specific IRS rules are followed, a 1031 Exchange can help preserve wealth, amass assets, generate investments from cash flow, and offer the opportunity to diversify your real property investment portfolio. One word of advice, always consult your tax and accounting specialists to insure your transaction(s) are structured to meet the 1031 guidelines.
Of course, we are glad to direct you towards professionals that can answer questions on these transactions and guide you to successfully grow your asset base as your portfolio changes over time.
Until next time . . .