Over 1,400 farms, land, and country homes sold since 2002.
When it comes to using a 1031 Exchange to invest in North Carolina and Southern Virginia real estate, you’ve come to the right place. Allow my team and I to be your #1 resource for knowledge and expertise about IRS Tax Code 1031 Exchanges, Forward and Reverse. This is a powerful tool that, when used properly, can yield tremendous financial results. Let’s dive into using a 1031 Exchange in real estate.
So, What is a 1031 Exchange?
A 1031 Exchange is a section of the IRC that allows you to sell a property, use those proceeds to invest in a new “like kind” property, and defer capital gain taxes on that new property. In order to properly execute this kind of exchange, you’ll need to work carefully with an experienced agent to thoroughly plan it. It’s a wonderful way to increase your return on investment and grow your financial portfolio significantly. You just need the right agent on your side to pull it off.
Are there any rules to follow?
The US Tax Code and Treasury Regulations sets down specific rules governing how investors can use the 1031 Exchange—all transactions must adhere to this. The properties involved in a 1031 Exchange must be “like kind,” and used for a business or trade purpose as an investment. When you sell your first property using this exchange, the revenue from that sales must immediately go to a Qualified Intermediary. As the investor, you are NOT allowed to hold onto it. Every penny that you make from this sale must then be invested toward the new property. Any “cash” proceeds are subject to taxes.
In addition, the second property must be of equal or greater value to qualify. Otherwise, the investor will have to pay taxes on the difference.
Qualified Intermediary (QI)
Typically, your QI is a title company or an attorney. This entity is responsible for holding onto the money generated from selling the initial property.
Relinquished Property
This refers to the initial property you plan on selling.
Replacement Property
This refers to the new property you plan on using the 1031 Exchange to purchase.
Identification Period of Replacement Property
In order to use the 1031 Exchange, the investor must identify replacement properties within a period of 45 days. There are three additional rules to follow:
- Three Property Rule: the investor may identify as many as three replacement properties with the identification period
- Two-Hundred Percent Rule: the fair-market value of the replacement property (or properties) may not exceed 200% of the relinquished property’s value.
- Ninety-Five Percent Exception: the total combined value of the replacement properties must be at least 95% of the fair market value
Like Kind Property
Both properties involved in the 1031 Exchange must be similar.
Basis
This is the property value of the relinquished property.
Forward 1031 Exchange
This is when the relinquished property sells first, and the QI uses that money to fund the replacement property.
Reverse 1031 Exchange
This occurs when the replacement property is bought before selling the relinquished property.
The 3 Most Common Mistakes People Make with 1031 Exchanges
Not Working with an Experienced Agent
1031 Exchanges are tricky to execute, there’s no doubt about that. It requires a tremendous amount of market expertise and prior planning to successfully pull of this kind of exchange. But, it can be done! All you need is the right real estate agent on your side—one with specific experience using 1031 Exchanges to invest in local properties.
Trying to Work Alone
When it comes to almost any real estate transaction, an agent almost always proves their worth right off the bat. Working without an agent to use a 1031 Exchange is difficult because of the specific rules and paperwork that must be adhered to and completed.
Listening to Bad Advice
You can’t trust just anybody when it comes to real estate! You deserve an agent who knows this market like the back of their hand. When you choose to work with me and my team, Farms Land & Country Homes, you can rest assured that your every need is being met by a professional who knows exactly how to execute a 1031 Exchange.
Interested in Learning More About 1031 Exchanges?
If you’re ready to start exploring your options for investing in North Carolina and Southern Virginia real estate, then it’s time to give me a call! Let’s schedule your confidential analysis today.