Last month, we discussed how the multi-family industry is booming with an increase in sales and prices. We have observed a number of out-of-town investors exchanging into relatively affordable apartment complexes in the Fresno and Madera Counties.
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This month, we'll dive deeper into this tax-deferred exchange, commonly known as a 1031 Exchange. The following are five things you should know about 1031 exchanges*:
1.
Section 1031, which allows for "like-kind exchanges," has been in the tax code since 1924, with the most recent significant modification in 1991.
2. A 1031 like-kind exchange is not a tax "loophole," but rather a deferral - the owner pays taxes on the property when it is ultimately sold for cash, as opposed to when it is exchanged for another property.
3. Any cash you receive as part of the deal - for example, if the property you receive is valued lower than the one you exchange it for and you receive cash for the difference - is taxed as partial sales proceeds (consult your CPA for the current capital gains rate).
4. 1031 exchanges are only allowed for investment or business properties, but in some cases can be used for properties such as vacation homes, and for tenants in common real estate.
5. Timing is important. Up to three "replacement properties" must be designated within 45 days of the sale of your property, and you must close the deal on a new property within six months (180 days) of designation.
*Source: Erin Stackley,
REALTOR Mag, Summer 2015.
