Are you looking to sell your property and buy another while deferring paying capital gains tax? With a 1031 exchange into existing property, you can easily do a “like-kind” exchange to another property with the same or equal value.
Compared to traditional selling which will require you to pay taxes exceeding 20-35% of your capital gains, the 1031 exchange allows you to reinvest all your proceeds into another investment while keeping all your capital working for yourself.
It is common among investors seeking to improve homes without incurring tax liability. Read on to learn more about 1031 exchange into existing property.
What is 1031 Exchange?
A 1031 exchange is a mechanism for real estate investors that enables them to exchange one property investment for another while deferring capital losses and gains or capital gains tax that would otherwise be due at the time of transaction.
1031 Exchange Vs. Reverse 1031 Exchange
A taxpayer who wishes to engage in a 1031 exchange will first sell one investment property and then use the money from the sale to fund the purchase of another investment property. It is typically described as a 1031 exchange into existing property.
Now, the procedure is carried out in the other direction during a reverse1031 exchange.
In a reverse 1031 exchange, the investor will first purchase a new home, and then they will have a period of one hundred eighty days to sell their previous property, which should have a value that is either comparable to or lower than the value of the new property.
Should you decide to do a reverse 1031 exchange, it is also possible as long as like-kind properties involved here are recognized as eligible for tax deferral by the IRS.
Also, you can use a 1031 exchange to pay off a property you already own, but you are required to do the Napkin Test and ask for further assistance from qualified legal or tax professionals.
What if I want to improve a property I already own?
Now, talking about 1031 improvement exchange on property already owned, it might sound complex and impossible, but improvement exchange just means buying something and improving it by building on it. And it is definitely possible!
Any improvement can be in a form of repair to the total change from the ground-up, and all these open new doors of opportunities for new investors and possible additional improvements on that specific property.
It is, in fact, a move that investors prefer when acquiring a property they have been eyeing on. Definitely, the 1031 exchange improve existing property and it is up to the owner to design and create all those improvements.
Benefits of 1031 Exchange
Why should you do a 1031 exchange into existing property? Some of the benefits of this transaction are the tax deferment as well as potential increased cash flows from your real estate investment.
Tax Deferment
The 1031 exchange is especially helpful if you belong in a high tax bracket now and you would want to defer your taxes until the time when the former is expected to be lower.
As an example, if you are working now and are at your peak earning year, your tax will definitely be high. But years later, especially, when you decide to retire, your income will be lower which will be the best time for you to make a move.
Access to Emerging Markets and Diversification of Investment Portfolio
It is possible that investing early on in a market that is expected to see growth could result in higher returns in the future. A passive investor may be able to use a 1031 exchange to transition out of only one property managed into a wide range of passive investments.
It helps the investor diversify their risk exposure across markets and reclaims the time spent on property maintenance and management. An investor might use the proceeds from the sale of one property with high value to purchase numerous properties with better profits.
Increased Cash Flows
Another benefit of the 1031 exchange is having an increased cash flow for reinvestment since you will have more money available to acquire new properties.
You will not have to pay taxes on your new investment until you sell it if you use a strategy known as a 1031 deferred exchange. The strategy allows you to move up to one or more properties that offer greater features that are a better fit for your investing objectives.
Best 1031 Exchange Companies
As the 1031 exchange is seen as a good investment by many investors, it is crucial to be cautious about the next steps to undertake. It is much easier for us to plan and talk about how much we can gain from this investment.
However, the 1031 exchange follows the strict Section 1031 of the Internal Revenue Code guidelines wherein any error within the whole process, may take a toll on you and cost you hundreds to millions of dollars.
That is why it is imperative to look for the best 1031 exchange companies. Working with a reputable and competent 1031 exchange company brings lots of leverage and most of the time, they can be more affordable than having an attorney whole charges by the hour.
In a sea of exchange companies, it is important to check their track record, financial stability and competence, resources and expertise, and their scale in giving high-quality services at the most competitive and reasonable prices.
IPX 1031
When talking about the overall performance, it is IPX that is dominating. Having a long track of successful exchanges, IPS brags a complete array of possible 1031 exchange services and expertise in knowing local issues.
As with the related costs, the fees associated with IPX 1031 differ depending on the nature of the exchange, level of complexity, and location. It would be best to contact them to interact with a specialist who can provide you with further details on the charges and expenses related to your particular exchange.
First American Exchange
Unto the best value, First American Exchange tops the bar with its strong and solid track record and reputation while being backed up by one of the largest title companies in the US.
Their services are also accessible everywhere as their exchange experts are available in all states.
Exeter 1031 Exchange
If you are looking for a 1031 exchange company that is the best at handling complex exchanges, work with Exeter 1031 Exchange Services.
The company gives a money-back guarantee with a separate trust company that solidifies its security measures. The only cons here is that most of their offices are in the western part of the United States.
IRS 1031 Exchange Rules 2022
If you have already decided to proceed with a 1031 exchange, it is crucial to understand the IRS 1031 exchange rules 2022 for a successful exchange and tax deferral. There are rules you have to follow particularly on the following matters.
Note that this is not an exhaustive list of the rules involving the 1031 exchange. It is recommended for you to research more to supplement your knowledge.
Character and Nature of Acquired Properties
Character and nature are those that the Internal Revenue Code is referring to when it mentions “like-kind” as a description of the properties involved in a 1031 exchange.
Further, properties are considered to be of the same type if they have been kept for productive use in a business or trade, or for investment. This character and nature should not regard the variations in property’s quality and grade.
Replacement Property’s Market Value
For the 1031 exchange to work, the net worth or market value of the replacement property should be equal to or greater than that of the relinquished property.
Taxpayer’s Name
The name of the taxpayer should be the same in both titles, except in cases where someone used a single-member limited liability company when selling a relinquished property and used his/her/their name when purchasing a new property.
Conclusion
1031 exchange is a promising strategy to look into to play your cards better in real estate. However, it takes with its benefits the requirement to ensure that your steps towards getting the tax deferment, among other advantages, are correct.
If you are a real estate property investor looking to explore the 1031 exchange, you may consider getting help and guidance to get you started. Contact NNN Deal Finder to help you today.