What are the Benefits of a 1031 Exchange? Defer your Real Estate Tax Consequences.
The 1031 Exchange is one of the last great tax codes that exists. The main benefit of the 1031 Exchange is that it allows investors to take the money that should go towards taxes and use it to make more money. Essentially, you are selling an investment or business property and you are exchanging it for another property that you intend to use as an investment real estate or business.
There are many reasons why you may need a 1031 Exchange:
- Estate planning purposes
- Finding a property closer to where you live
- Getting out of management responsibilities, and more.
When you use the 1031 Exchange, you must adhere to the like-kind rule. This rule exists because the 1031 applies to anything held for productive use in a trade, business, or for investments. It’s not just real estate. Fortunately, the like-kind rules for real estate are pretty simple: you can exchange any real estate for another piece of real estate for investment or business purposes.
Some people want to exchange their investment properties for a vacation home or their dream home. Your vacation home may qualify as an investment so long as it is used less than two weeks out of the year or less than 10% of the time it’s been rented. You cannot initially use the 1031 Exchange for your primary residence. However, there is a revenue ruling that states if you hold the property as an investment for two years or more, you will not be challenged if you convert it to your personal residence.
Keep in mind that the 1031 Exchange defers taxes - the taxes don’t just disappear. If you do convert a property to your primary residence, you could take a primary residence exclusion down the road.
If you are interested in buying and selling real estate, investment real estate, commercial real estate, exchanging property for investment purposes or taking advantage of the 1031 exchange tax deferral, please do not hesitate to contact San Luis Obispo Realty, your top resource for buying or selling real estate on the Central Coast!