I absolutely love how much I learn every day in real estate. This week I took a class on 1031 Exchanges and y’all probably think learning about the tax code is super boring, but I was on the edge of my seat! Because 1031 Exchanges are one of the best tools a real estate investor has for escaping taxes.
And, fun fact: it’s been around since 1921. Seriously. (I could really nerd out on the history because it has to do with enacting capital gains taxes for the first time because of World War 1 and then people freaking out about it, and thus a tax-avoidance plan was worked out.)
So here’s the deal: If you own rental property or several properties, or are planning on becoming a real estate investor, you should be very familiar with what a 1031 Exchange is and how to use it to save money on taxes.
Here’s how an exchange works:
Let’s say you bought a single- family home in 2010 and have been renting it out. But now you’d like to sell it in order to buy another rental property, or even several rental properties. The investor in this scenario would simply put their rental home on the market, then when it sells, have a firm that specializes in these exchanges hold the money they made off the sale of that property. Within 45 days, the investor must have identified at least three properties he or she is interested in purchasing that are of equal or greater valuethan the relinquished property. And within 180 days, the investor must have closed on one or several of those identified properties.