1031 Exchanges: What Are They?

As a real estate investor, you’re certainly concerned about protecting the wealth you’ve earned with your investment properties. When you sell an asset, you want to keep as much of those earnings as you possibly can, but taxes can be daunting.

If you want to defer taxes on the sale of an income-producing property, a 1031 Exchange can be one way to do that.

In today’s blog, we’re talking about how your Bozeman property management company can help you trade in one income-producing property for another. Examining the power of a 1031 Exchange.

Defining a 1031 Exchange

A 1031 exchange is a tax resource that’s named for Section 1031 of the IRS code. Property owners can defer the taxes that may be due on the sale of a property by investing those profits into the purchase of a different property.

Owners know that when they earn a lot of money off the sale of a rental property, there are capital gains taxes to pay. But, if you’re willing to use the proceeds from the sale of one property to buy another, you won’t lose any of those proceeds to taxes.

Understanding the Rules of 1031 Exchanges

You have to exchange like-kind properties when you’re taking advantage of this investment resource. You cannot sell a rental property and avoid taxes by purchasing a personal home for your family. Instead, you need to buy another income-producing property with a value that matches or exceeds the property you’ve sold.

Here’s an example. If you own an investment property that’s valued you at $500,000, you have to find another investment property or several rental properties with a net worth of $500,000 or more. You can sell one single-family home and buy three apartment units. Or, you can sell a multi-family building and buy two single-family homes. The properties don’t have to be exactly alike, but they do have to be investment or income-producing properties.

What’s the Timeline for 1031 Exchanges

There are also deadlines associated with a 1031 exchange. You have to identify up to 3 properties you want to buy within 45 days from the closing of your first property. We recommend that you have 2-3 properties picked out that you’re interested in beforehand. In addition, you will need to complete the exchange within 180 days of selling the original property. The entire transaction must be completed within those 180 days, otherwise, you’ll be liable for taxes.

Benefits of the 1031 Exchange

There are several benefits for rental owners who use the 1031 Exchange, and you should talk to your Bozeman property managers about the possibilities. This exchange allows you to dispose of a property without paying capital gains taxes. If you’ve wanted to sell a property but you weren’t thrilled about paying the taxes, this is one way to continue growing your investment portfolio.

Other benefits include:
  • There’s an opportunity to increase the number of assets in your portfolio. When you sell one property and make a lot of money, you can use the proceeds to buy two or three properties instead of just one. This provides you with additional income streams.
  • You can save on maintenance costs. If a particular rental property has stopped cash flow because of all the maintenance and repairs, you’ll be able to take it out of your portfolio and replace it with a newer property that has fewer expenses attached to it.
  • You can stay invested in the real estate market. Many investors hesitate to sell a property because they know it can be expensive to re-enter a growing market. With a 1031 Exchange, you can sell that property and continue investing in real estate that will appreciate in value.
We have a lot of experience helping owners and investors succeed with rental properties and investment portfolios. If you have any questions about the 1031 Exchange or anything pertaining to property management in Bozeman, please contact us at Peak Property Management.