What Is A 1031-Exchange?

One of the best tools that any real estate investor has in their back pocket is the beloved 1031-Exchange. This particular section of the IRS Code allows for an investor to defer paying any capital gains taxes on an investment property, provided that it is sold at the same time that a “like-kind” property is purchased from the profits of the sale of the first property. If you are new to investing in real estate, the 1031-Exchange will become a major component in your business, meaning you need to learn the ins and outs of how to use it to your advantage.

How Depreciable Property Comes Into Play

One of the key terms that you will encounter with a 1031-Exchange is depreciable property. Understanding depreciable property is important because there are special rules that come into play when depreciable property is involved. Essentially, when you earn a profit from a depreciable property, it will trigger a special tax because that profit will be classified as depreciation recapture.

If you exchange a piece of improved land that holds a building for a piece of unimproved land that doesn’t have a building, that depreciation that you initially claimed on the previous building will be considered ordinary income. However, if you decide to exchange one property for another, you can avoid paying this tax.

The Timeline Of A 1031-Exchange

One of the many rules that are required for you to take advantage of the 1031 section of the IRS code is that you comply with the specific timeline guidelines. As an Exchanger, you have 45 days to identify potential property replacements for your current property and 180 days to close upon the replacement property. The entire exchange must be completed in a total of 180 days, not 45 plus 180.

Filing Is Not For A First-Timer

As you can see, there are a lot of rules and details involved with a 1031-Exchange. Therefore, it is highly recommended that you enlist the help of professionals to assist you with this legality. Start with hiring a Realtor that specializes in investment properties because they will be able to identify qualifying like-kind properties for your current property. From there, an experienced investment property specialist will be able to further assist you through every other step of the exchange to protect you from costly mistakes that could land you in legal trouble.

Need Help Maximizing Your Des Moines Real Estate Portfolio?

There is so much to learn and know about the laws, taxes, and general real estate details in order to illuminate unnecessary operating costs and maximize your profits. Since not all investment properties qualify for the same benefits, it is important to partner with a Des Moines real estate investment expert to identify those that apply to you. To find out how to make the most of your Des Moines real estate portfolio, give us a call today.

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Liz and Chase