1031 Exhanges

Many of Team Whitney’s clients ask us about the difference between a 1031 exchange and the capital gains $250,000 and $500,000 tax exemptions.  To make it simple, this blog on 1031 exchanges refers to selling one of your investment or income properties and exchanging it to purchase another income or investment property.  The $250,000 and $500,000 capital gains tax exemption rules apply to your primary residence only, which we will discuss in more detail in a different blog.

A 1031 exchange is a way to avoid capital gains taxes by selling one investment property and reinvesting all of the proceeds into a purchase of another investment property of equal or greater value.  The properties you are selling and purchasing must be like-kind, and there are certain time limits you must adhere to.  In regards to like-kind, the definition is very broad.  For example, you can exchange vacant land for an industrial property, or exchange a commercial property for a residential property.  You cannot though, for example, exchange property for a coin collection.  Those are not considered like-kind.  In regards to time limits, you have up to 45 days after closing escrow on the property you are selling to identify up to 3 properties you will be potentially purchasing in the exchange.  If Team Whitney represents you as a Seller, we will recommend making the sale of your investment property contingent on you securing a replacement property during the escrow period.  We do not want to close the sale escrow with the possibility of you not being able to secure a replacement property within 45 days after closing.  One of the three properties you choose must close escrow within 180 days after the close of escrow of the investment property you sold.  There are a few other ways to identify property instead of using the 3 property rule we can discuss at a personal consultation.  The most common way to identify properties is by using the 3-property rule, so that is the one we used here for purposes of this discussion.  In a 1031 exchange, you will not receive the proceeds directly from the sale of your investment property.  The proceeds will go to a qualified intermediary who will hold the funds, and then transfer them directly to the escrow company for the purchase of your new investment property.  If you plan on completing a 1031 exchange (or a reverse 1031 exchange), it is important to hire a real estate team who is not only knowledgeable on the process, but also a team who will put the necessary protections in place for you to avoid capital gains taxes. 

For more information or to set up a personal consultation, please contact Danielle Whitney Moore with Team Whitney (Keller Williams Realty L.A. Harbor) at (310) 987-9103.