Let’s say you’ve got yourself a rental property and you’ve worked hard to get rents up and keep expenses low. The property is profitable, and you are looking to trade up by selling it and buying a more expensive property. The problem is that if you sell, you will have to pay capital gains tax on the sale as you would with a fix and flip or wholesale deal. That tax could be a heavy hit if you have sold the property for a gain, and it will stunt your growth as an investor. What can you do?
That’s where a 1031 exchange comes in. A 1031 is a vehicle through which you can sell rental real estate and roll all the gains into a new purchase. Here are the general rules of 1031s.
4 Rules of a 1031 Exchange
Here are the highlights:
1. It must be a qualified transaction, meaning the property you sell must be held for investment intent. You have to hold it for passive income, not capital gain. In other words, fix and flips don’t qualify.
2. The property you sell and the one you buy must be held by the same owner. This means you can’t sell a property held in your personal name and buy one through an LLC. Watch the video for an idea how to get around this one!
3. Once you sell, you have 45 days to identify potential new purchases and 180 days to actually close on the transaction.
4. There are no extensions, meaning if you don’t close that new purchase 180 days after you sell, you have to pay tax on the gain. No exceptions.