Save Money When You Invest In Real Estate

The 1031 tax-deferred exchange on real estate is one of the most underutilized parts of the tax code. While it may seem overwhelming for investors and real estate agents alike, the goal is to eliminate capital gains tax when selling real estate and have it roll over into the purchase of a new property and postpone tax. To be clear, a 1031 exchange doesn’t make capital gains tax go away; it just postpones it.

Boiling the process down to 5 key points will make it easier for investors and their real estate agents to decide if this opportunity is right for them.

1. Like-Kind Property: This is one of the most misunderstood concepts in 1031 exchanges. Like-kind relates to the use of properties, defined according to its nature or characteristics, not its quality or grade.This means that the old property and the new must be held for investment or used in business. Vacant land will always qualify for 1031 treatment whether it is leased or not. The range of qualifying properties is broader than you might imagine. An experienced real estate agent should be able to guide you in finding qualifying properties.

   Some key points:

   • Primary residences cannot be exchanged.
   • Both properties must be in the United States.
   • The properties must be of equal value.
2. Use a Qualified Intermediary The law states that the taxpayer must use an independent third party (intermediary) to handle the transaction. This person will hold the funds in escrow until the exchange is complete, be aware of the strict timeline, and produce the documents for the exchange. The intermediary cannot be a family member. Also, it cannot be someone the investor has had business with in the past 2 years such as their lawyer or real estate agent.
3. Time Frame: You have two time frames that are clearly defined and are without exceptions in a 1031 exchange. These are key in making the transaction work.
   • 45 Day Identification Period: The Internal Revenue Code dictates that the new property be identified within 45 days of the closing of the sale of the old property.
   • 180 Day Purchase Period: Section 1031 specifies that one or more new properties must be purchased and closed within 180 days of the closing of the old properties. The property being purchased must be on the 45-day identification list. No new properties can be added after 45 days.
4. Understand the Reinvestment Value: To qualify for the 100% capital gains deferment, the new property must be of equal or greater value. If the value is less, the transaction is possible but capital gains tax on the profit will not be deferred.
5. Inform the IRS: Your tax return will likely need to be accompanied by IRS Form 8824. It contains information about the properties, a timeline, who was involved, and the amount of funds involved.

There are countless scenarios to make a 1031 work for you. Understanding the core concepts can help investors understand and plan their investment strategies. It is advised that investors also consult a CPA or an attorney who has experience and is knowledgeable with 1031 tax-deferred exchanges.

have lured potential buyers to the market and available properties are harder to find. Even if a house just hits the market, chances are you won't be the only one making an offer if it's priced reasonably and in good condition. Being prepared with an experienced real estate agent, budget, and expectations will ensure that you can compete in this hot market.

These tips can help you come out on top.

Choose an experienced, responsive real estate agent.

From house-hunting to closing, a buyer's agent guides you through the entire process. An agent with an established reputation in the area you are looking in will be able to alert you to suitable properties as soon as they hit the market or even before. They will know the neighborhood, it's prices historically, and will be able to let you know if the house is a good fit for your needs. An expert agent will have the negotiating skills to help you make an offer that is competitive and fits your budget.

Get pre approved.

It’s imperative that you know exactly how much you have to work with for a mortgage before you get started looking at properties. This will let you know the price point to start your search but also how much you can bid over asking if needed. Time is of the essence and having your mortgage in order will make the process much smoother.

Bidding wars are to be expected.

Set a firm price that you are willing to spend. It’s tempting to feel the pressure of wanting to get a particular home, especially if the housing stock is low, but keep your eye on what is sustainable for you in the long run. Buying your “dream home” only to have overwhelming financial stress after will only lead to regret. It’s not unusual for buyers in the current market to write multiple offers before getting their home. Don’t get discouraged.

Be flexible. Be flexible. Be flexible.

• Be willing to expand your search area, especially if you were targeting popular neighborhoods. You can get more bang for your buck as far as square footage and amenities if you are willing to look in other areas.
• Accommodate the seller’s closing preferences. Maybe they need to stay in the home a few months longer to complete the school year? Or, they want a quick closing. You want your offer to meet their needs.
• Remove contingencies. A contingency clause specifies that certain conditions must be met (such as financing or a home appraisal) before a real estate contract can be signed. By doing this, you tell the seller you are serious and ready to go forward with the transaction.
• Know what is absolutely a must for you and what you can bend on. (Be prepared to bend more than you may like…) Being in a particular school district may outweigh having the guest bedroom. Keep your priority list short. In this market you most likely won’t get everything you desire but with your agent, you will be able to find the home that is sustainable for you and your family for the long term.

The 1031 tax-deferred exchange on real estate is one of the most underutilized parts of the tax code. While it may seem overwhelming for investors and real estate agents alike, the goal is to eliminate capital gains tax when selling real estate and have it roll over into the purchase of a new property and postpone tax. To be clear, a 1031 exchange doesn’t make capital gains tax go away; it just postpones it.

Boiling the process down to 5 key points will make it easier for investors and their real estate agents to decide if this opportunity is right for them.

1. Like-Kind Property: This is one of the most misunderstood concepts in 1031 exchanges. Like-kind relates to the use of properties, defined according to its nature or characteristics, not its quality or grade.This means that the old property and the new must be held for investment or used in business. Vacant land will always qualify for 1031 treatment whether it is leased or not. The range of qualifying properties is broader than you might imagine. An experienced real estate agent should be able to guide you in finding qualifying properties.

   Some key points:

   • Primary residences cannot be exchanged.
   • Both properties must be in the United States.
   • The properties must be of equal value.
2. Use a Qualified Intermediary The law states that the taxpayer must use an independent third party (intermediary) to handle the transaction. This person will hold the funds in escrow until the exchange is complete, be aware of the strict timeline, and produce the documents for the exchange. The intermediary cannot be a family member. Also, it cannot be someone the investor has had business with in the past 2 years such as their lawyer or real estate agent.
3. Time Frame: You have two time frames that are clearly defined and are without exceptions in a 1031 exchange. These are key in making the transaction work.
   • 45 Day Identification Period: The Internal Revenue Code dictates that the new property be identified within 45 days of the closing of the sale of the old property.
   • 180 Day Purchase Period: Section 1031 specifies that one or more new properties must be purchased and closed within 180 days of the closing of the old properties. The property being purchased must be on the 45-day identification list. No new properties can be added after 45 days.
4. Understand the Reinvestment Value: To qualify for the 100% capital gains deferment, the new property must be of equal or greater value. If the value is less, the transaction is possible but capital gains tax on the profit will not be deferred.
5. Inform the IRS: Your tax return will likely need to be accompanied by IRS Form 8824. It contains information about the properties, a timeline, who was involved, and the amount of funds involved.

There are countless scenarios to make a 1031 work for you. Understanding the core concepts can help investors understand and plan their investment strategies. It is advised that investors also consult a CPA or an attorney who has experience and is knowledgeable with 1031 tax-deferred exchanges.