This conversation has come up frequently over the last few months. When speaking with investor clients, everyone is contently worried about tax implications and how to take advantage of situations.
If you are in the real estate game for the long run, one of your best tools in this market is a 1031 exchange. It allows you to sell a property that you currently own and buy another property while deferring the taxes you would have had to pay on gain of the sale. It is a very useful tool, especially if you are trying to “trade up” or increase the amount of units you own, quickly and efficiently. (For example, you own a two family, and want to sell that in order to buy a 4 family.) The important factor to remember is that your exchange must be made for a property at equal or higher value. (You sell a two family for $400,000, you must buy a property at a value equal to or greater that amount. $400,000+.)
There are important timelines you need to follow in order to make these transactions work. From the time you sell your property, you have 45 days to identify the property you are going to be exchanging into. Once identified, you have 180 from the previous sale, to close on that property and satisfy the regulations of the 1031.
Using a 1031 exchange is a great way to build your portfolio in a tax efficient manner. The key to the exchange is making sure that you have identified a property before you decide to make any big decisions. The last thing you want to do is get involved in a sale, and not have an identified property to trade into. Each circumstance is different, but that is one of the key piece of advice I share with investors.