Colorado Real Estate InvestmentsWhat is a 1031 Exchange? This is a question we hear a lot from our clients that have recently purchased a rental property (or hope to do so in the future). If you’ve ever considered investing in a rental property, the 1031 Exchange should definitely be part of your plan. Here are 5 things to know about a 1031 Exchange:

  1. What is a 1031 Exchange? To put it simply, a 1031 Exchange is a section of the tax code that incentivizes the swap of one business or investment asset for another (most often real estate). For our clients, this most often comes in the form of swapping one rental property for another.
  2. Why use a 1031 Exchange? To defer taxes, of course! In other words, the IRS lets you change the form of your investment without (or with limited) taxing or recognizing capital gain.
  3. Can I use it for my personal residence? Sadly, no. The benefit is only for an investment or business property. Vacation homes are in a gray area so plan to meet with a tax expert before counting on it.
  4. What does “Like-Kind” mean? The IRS states that the properties must be “Like-Kind”. Sound vague? Well, it is, but basically you can’t swap something like a rental home for a new yacht. The good news is that the IRS’ definition of ‘Like-Kind’ is more liberal than one might think. We usually advise our clients to engage a tax professional early and then we work as a team to determine what options are best.
  5. How Long Do I Have? There are two main deadlines to consider with a 1031:
    1. You Must Designate the Replacement Property within 45 Days. That might seem quick...and honestly, it is. For that reason, we highly recommend that our clients have a replacement property in mind before listing their original property. In a hot market (like Denver’s current real estate market), finding a property that’s on the market long enough for this can be tricky so it’s really important to work with an experienced real estate agent. The good news is that the IRS allows you to designate up to three properties, one of which must be the property you eventually close on.
    2. You Must Close within Six Months. You must close on your new property within 180 days of the closing of your old property. That includes the 45 day time period that you have to designate potential replacement properties so moving fast is key.

Like most things involving the IRS, the 1031 Exchange is not always as simple as we’d like it to be. So while there are more nuances to a 1031 Exchange, understanding the basics is a great place to start. We work with many clients to help them begin investing in real estate in Colorado. If owning a rental property in Colorado is one of your current or future goals, we’d love help! Or, if you simply have more questions about 1031 Exchange rules, feel free to leave a comment below or just contact us directly.

Note: While we’ve done our best to summarize, please note that it’s always best to work with a tax professional on your 1031 Exchange.

Posted by Jess Feaster on
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