Real estate investors in Fort Worth have some good options when it comes to maximizing the value of their investment property portfolio. One of the best ways to sell an existing income property and acquire a new one is through a 1031 Exchange. With this program, you can defer the capital gains taxes you would pay on the sale of your initial investment property.
The Basics of a 1031 Exchange
This tax deferment program is named for the IRS code that reflects it.
It allows property owners to defer paying the taxes on any income they earn off the sale of their property by purchasing another like-kind property with the proceeds of that sale.
So, if you sell an investment home and your capital gains are $150,000, you can take that money and invest it in another investment property. Your taxes are deferred.
Don’t be put off by the term like-kind. It doesn’t mean you have to buy a property that’s exactly the same. You can sell a single-family rental home and buy an apartment building. It simply has to be one income-producing property for another income-producing property. You cannot use the 1031 Exchange to sell your rental units and then buy yourself a vacation home.
Timelines and Restrictions to the 1031 Exchange
When you sell your original property, you aren’t allowed to touch the money that you make. It goes into a separate escrow account that’s managed by a Qualified Intermediary.
After you close on that sale, you have 45 days to identify a like-kind property that you’d like to purchase. You don’t have to buy it yet, and there’s always a chance that your offer won’t even be accepted on the new property. But, you have to at least identify a property within 45 days. It’s best to identify more than one property.
You need to close on a new property within 180 days of selling the first property. So, your timeline to buy a new property is 180 days; the clock does not restart after the 45-day identification period.
Benefits and Advantages to a 1031 Exchange
The tax deferment benefit is a great reason to use the 1031 Exchange, but there are other advantages as well.
For example, you can leverage the property you already own in order to buy something that’s more valuable. Perhaps you are looking to sell a rental home that’s beginning to need a lot of maintenance. If you have a lot of equity built into that property, you’ll have the opportunity to purchase a property that can earn you more in rental income. By using this exchange, you increase your buying power and your potential for cash flow and long term returns.
Your property manager may have some ideas about where there are better opportunities for high quality rental properties in your market. If you’d like to learn more about the 1031 Exchange and how it might help, contact us at Trend Property & Management. We provide professional property management in Fort Worth, and we’d love to talk about your investment goals.