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3 Things to Understand About Rental Property 1031 Tax Delayed Exchange

If you are investing in real estate, it is essential to understand what a 1031 exchange is. A 1031 Exchange is at its most basic a tax strategy that you can use to help increase your net worth and can utilize to grow your real estate portfolio.

1. Exchanging Businesses or Properties

Under the 1031 exchange rules, which are part of the Internal Revenue Code, one can exchange one real estate property for another property or business that is determined to be like-kind. Thus, you can essentially "switch" properties with another owner without having to pay for any gains or losses during the exchange for the IRS.

2. Knowing What Like-Kind Means

It may seem like a simple phrase, but it is essential to understand what a like-mind property or business means to the IRS. Basically, it means that the property has to be similar in character or similar in nature. It doesn't have to be the same quality of the property, but it does need to be the same type of property.

For example, you could exchange an apartment building for a different apartment building, but you may not be able to exchange an apartment building for something like machinery. You should always verify if an exchange is like-kind with a tax attorney or tax specialist who works in this particular area of the law.

3. Understanding the Different Types of Exchanges

Next, it is essential to understand that there are different types of exchanges that you can engage in. However, there are about five common types of exchanges that are used regularly.

The first is a delayed exchange, where one property is being sold and another property is being purchased during the designated time frame.

The second is a simultaneous exchange, where the current property is sold and the replacement property is bought simultaneously.

The third is a delayed reverse exchange, where you are purchasing a replacement property before you relinquish the property.

The fourth is a delayed built-to-suit exchange, where you are replacing one property with another property that is being built specifically to meet your needs.

Then there is a simultaneous build-to-suit exchange, where you are buying a property that is being built to meet your needs before you sell the current property.

With any of these types of exchanges, you have to identify the replacement property within a set time frame and complete the purchase within a slightly longer time frame. In addition, the exchange has to be either equal or greater in value to what is being sold.

If you want to grow your real estate portfolio, one way to do so is with a rental property 1030 tax delayed exchange. The process is a little complicated, but if you work with a tax professional and broker who understands the process, you can trade up to a better property.