By Terrylynn Fisher, Broker Associate www.buystagesell.com
If you own an investment property, rented out for income, and would like to sell it, consider a 1031 tax deferred exchange.
Why? Because when utilizing an exchange, the entire profit can be used to purchase a new property. This avoids paying a huge portion in taxes and investing whatever is left. Think over time how much more wealth you are creating for yourself, your retirement, your heirs by utilizing this tax benefit. There are IRS rules for a 1031 Tax Deferred Exchange and a Reverse Exchange, and they must be followed to the letter.
Selling a property with the hope of completing a 1031 Tax Deferred Exchange can cause stress because of the deadlines, especially in a market with low inventory. IRS rules state that in a typical exchange from the time you close the escrow (leg one of an exchange,) you have 45 days to designate the property you want to purchase and 180 days to close the escrow. There is not one minute, hour, or day leeway on those time frames.
For example: If you were to close your investment property on April 1, you would have until May 16 to identify the purchase property (or properties) you are going to exchange into, and up to September 28 to close on that property or properties.
California Disaster Designation Extends Deadline
What has changed? The IRS has defined an “affected taxpayer” and designated areas of natural disasters in California and other States; and Contra Costa and Alameda and other Counties in the Disaster Relief Notice, which extends both of those deadlines to October 16, 2023, to both identify and close on an exchanged property. This is unprecedented.
This allows clients doing a 1031 exchange to take more time to do the due diligence on properties they want to purchase and potentially get a better interest rate during the ups and downs of the financial market. In addition, they can take more time to find a suitable replacement property and not have to rush to pick something. This is a big financial decision affecting your goals for retirement, your need to move to a better performing asset, or to move to something in closer proximity to where you are living and investing.
Reverse 1031 Exchange
You can purchase a property and then sell and exchange an investment property. This is called a Reverse 1031 Exchange. There are rules, and complications, but just as with a regular exchange, you will need an exchange accommodator, approved by the IRS as an intermediary, to receive the properties and funds during the process. The Exchange Intermediary you choose can give you the rules and advise how they work, guiding you toward a successful exchange.
One such company some of my clients have used to great success is www.IPX1031.com. James Callejos is a very knowledgeable and skilled expert in this field. He would be happy to help you understand the nuances and details of what you are wanting to accomplish. You cannot do this alone. And yes, you can purchase more than one replacement property, and keep out some funds if you so choose. Just be sure you understand the nuances and tax consequences of your actions. Have a qualified 1031 Exchange Intermediary on your team. (And a Realtor who understands and has done them for clients.)