Hey team, hope everyone is doing well. I came across a really great little primer on 1031 exchanges that I got from my CPA I just want to share a quick tidbit with you a few items on here.
I think they’ll help you I know that most of you are familiar with 1031s, but there’s just a few little nuggets here I think are really pretty good and worth sharing.To check out the full article just go here to forward slash 1031 dash exchanges Or you can shoot me an email and I can just send you the link.
Not a big deal. But good stuff. And we’ll jump in real quick. So what qualifies and where investors get tripped up?
And this is kind of why I wanted to share this with you. So, uh, in short, you know, what, what is a 1031? I know most of you know this, but it’s selling a piece of an investment property or business use real estate and deferring the taxes by rolling the proceeds into another qualifying property.
So you’re, you’re just deferring the taxes. You’re not going to never pay taxes on it, but you’re deferring the taxes when you sell one piece and you get something different.
So the cool thing is it’s, it’s named after section 1031 of the IRS code, but I didn’t know this, but it’s been around for over a hundred years in some form or another, so it’s not like it’s a new thing.
The key concept, though, is like kind, you’re exchanging one, one like kind property for another, and we’ll get into that a little bit lower down, but, um, the IRS requires a third party, uh, intermediate, uh, intermediary, intermediary facilitate the exchange process, and we know that there’s those,um, uh, title companies that do, you know, a 1031 division. They have to hold the money. The client, you can’t touch the money.
The client can’t touch the money or avoids the exchange. So this goes on to talk about what qualifies. There were a few changes under the old Tax Cut and Jobs Act that changed it.
Apparently before you could do other things that were not taxable. Real property, but at this point, it’s real property only.
So what’s eligible? Commercial buildings, rental properties, raw land, industrial facilities, retail centers, uh, oil, gas, and mineral interests, you know, things like that.
Um, and you can even do lease holds, not that we have those. Apparently you can. Um, but this is the part that I wanted to share right here.
It’s worth noting. Uh, it’s the IRS treats, it’s like kind. You don’t, they don’t have to be the same type of property.
So you don’t have to change, you know, uh, four plex for another four plex or anything. like that. It can be raw land as it says here like raw land for an apartment complex or a strip, all for a warehouse.
It’s the point is is they’re held for in an investment or business use. That’s what the IRS means as a like kind.
So it has nothing to do with a type of property. It’s that you own it as an investment. So what doesn’t qualify?
There’s a few things that don’t, um, fix and flip. If you’re just doing it to, uh, resell real quickly, you can’t do this.
If it’s a primary residence, you can’t do it. If it’s a second home or vacation home, you can’t, maybe you maybe not.
There’s some strict uses and that’s what I want to cover really quickly here as well. And then if it’s four property you can’t do it.
So vacation rentals, that’s where it’s really interesting, right? So this goes on and spells out here that you can probably do a vacation like a VRBO.
But you’ve got to, it’s got to be rented for at least 14 days in the year. But then your use of it is limited to the same 14 days or 10% of the rental days, whichever is greater.
So if you want to use that place in St. George as a, as a rental and do an exchange on it, you got to demonstrate that you rented it for however many days you stayed in it, uh, as a rental.
So if you stayed 30 days in and on your own in the middle of winter, you got to, you know, you got to rent it for at least 30 days to kind of make the justification that it really was a rent.
the tax care must meet these criteria for at least two years before and after the exchange. A couple other things that you probably already know.
Rules on the timing, you have 45 days to identify 180 days to close and your intent matters. They look at this, you know, on the timing that, you know, if you’re just trying to do something to avoid taxes, they’re going to nail you for that.
There’s no statutory holding period, but retaining the prop, the replacement property for at least a year after is generally considered a prudent guideline.
So if you go exchange something you want to turn on, sell it 30 days later, it’s probably going to avoid it.
So whatever else you’re exchanging, uh, We’ve got to hold it for at least a year and then you can sell it if you wanted to.
Finally, they go on to talking about what the role of the intermediate, to the qualified intermediate areas and then advance exchange options like somebody that wants to do a reverse exchange where you buy first and sell later.
Don’t have time to cover that, but it is in the article. So again, you can go back to Hainian Company CPAs or HainianCPAs.com slash 1031 exchanges. Whew, that’s a lot.
If you’re still with me, thanks for watching. Reach out if you have questions. Uh, I hope you’re doing well and we’ll talk to you soon.
