1031 Exchange Investment Property Sales
If you are hoping to sell your investment property so you can purchase a new (and hopefully better) investment property, you will need someone who understands the 1031 exchange process.
A 1031 exchange is a reference to a portion of IRS tax code that allows a seller to take 100% of their property’s gain and use it to buy a new property. As long as the 1031 exchange is properly executed according to the IRS, the seller will not have to pay any capital gains or depreciation recapture taxes on the sale.
This piece of tax code cannot be leveraged for all property transactions. A seller CANNOT 1031 exchange their primary residence for a new property. Sellers CAN 1031 exchange their properties if their properties are used in a trade, business or as an investment.
I wrote an entire guide on the 1031 Exchange Process and if you sign-up for my FREE monthly Sage Report newsletter, I’ll give it to you for free. Or if you don’t want to sign-up for my newsletter but really want the guide, just email me and I’ll give it to you.
What you really need to understand about the 1031 process is it is TOTALLY doable, but it does require some planning and great time management. The vast majority of my client base is located in Cambridge, Somerville and Medford, which are all extremely desirable places.
If that’s you, I typically recommend you go forward with either the delayed exchange or the reverse exchange.
The delayed exchange is the most common and works like this:
From the day your existing property closes, you have 45 days to identify a new property (or properties). .
From the day your existing property closes, you also have 180 total days to close on your new property.
The timer starts when you close on your existing property. For this approach, keep in mind that we can leverage strategies (like adding multiple 30-day extensions to any offers on your existing property) to buy us some time to find that new property.
The reverse exchange is a bit more complicated, but can be a good option as well. In this case, the exchanger (you), buys a new property before they let go of their existing property. You are not allowed to have ownership of both the property you’re selling AND the property you’re buying at the same time, so you need to bring in an “EAT” (Exchange Accommodation Titleholder) to temporarily take possession of one of the properties. With this approach you will also need to finance the purchase prior to selling your existing property, which can add some complexity for some 1031 exchangers.
I think 1031 exchanges are one of the least utilized approaches in the areas I work in and I don’t understand why. I regularly see property owners who have investment properties (both multis and condos) that are less than ideal due to poor location, layout, HOA issues, and other factors.
Instead of continuing to get less than ideal returns on their investment, the right thing to do would be to sell and 1031 exchange into a much better investment property scenario.
You might ask: why not just sell, keep the profits and buy and not bother with this annoying exchange process?
Firstly, all of your gains will be taxed. And in the multi-family world of Cambridge, Somerville and Medford, it’s not uncommon to see gains of $100k, $200k and even $1M+ on one property sale. That tallies up to a really high capital gains tax.
But there’s a second reason that most owners totally miss and that is depreciation recapture. When you own investment property, the property value (minus land value) is divided by 27.5 years. That amount is then deducted from your rental income each year as depreciation.
But when you sell, the IRS wants some of that back. But if you go the exchange route, that amount is actually deferred, meaning you don’t pay the tax on the depreciation recapture either.
This is all to say - if you have an investment property and you are unhappy with your returns or you are unsure if you can/should be getting better returns, REACH OUT to me and I will give you my honest assessment. Some properties are buy and hold forever, but there are many that should have been sold long ago and upgraded into a better scenario. Let me help, if it makes sense!