1031 Exchange MOST ASKED Questions

I talk to many individuals about their 1031 exchanges, assisting them in navigating the process and avoiding unnecessary taxes. Most inquiries are straightforward, allowing me to guide them towards a successful exchange.

Frequently, questions revolve around the timeline and steps to progress further in the exchange. Today's post delves into the harder most asked questions.

Popular Question 1:??I want to sell?my primary residence and I’m wondering, can I use a 1031 Exchange to defer taxes?

The short answer is NO. If you are selling your residence after living in it for a number of years , and you are wondering if your personal residence qualifies for a 1031, no at first glance, it does not.???The 1031 exchange is intended SOLEY for investment properties.??

If you wondering if there is ANY way you can even possibly turn this into an investment, well, that is a great question to ask. If your residence is in a popular travel destination or desirable travel location, you could move out of your residence and turn it into an investment property.??I don't want to mislead you, this is a long-term strategy that takes several years to enact. This article can walk you through how to do just that: How To Convert Primary Residence To Rental Property

Once you move out of your residence, you can list it on VRBO or AirBnB (if your HOA allows it).??You can look into either short-term or long-term rentals.???Your CPA will likely?recommend that you hold a converted asset for at least 2 years as an investment property to avoid any IRS scrutiny.??Again, consult your CPA or tax expert before jumping into any of these strategies.??

After a few years of operating this investment asset as a rental; you could then decide to sell the property in a 1031 exchange and avoid paying taxes on the gain, again, check with your CPA for confirmation.

Popular Question #2: There are two names on the title yet only one of the owners wants to do a 1031 exchange- is this possible?

When there are two names on the title of the property but only one person wants to do a 1031 exchange, many of you have asked if a 1031 exchange is possible. One criteria in a 1031 exchange is that you must take title in the same name as the title of the investment property that you are selling. The only way that this can work is if you alter your current title, often called a ‘drop and swap’ before the sale, ensuring that the title is in the name on the current property that it will be on the new property and distinctly creating two separate ownership vehicles, one for you and one for the other owner. This is a somewhat timely process that involves the need for a real estate lawyer. Once the title changes have occurred, the property needs to be held for two years in that title before considering a sale.

Popular question #3: I’m selling an investment property but I want to buy a residential property with the proceeds. Can I do that?

If you are selling an investment property to buy another investment property, then you can use a 1031 exchange to sell the property and avoid the tax. But what if your goal is to buy a residential property? That is not the intention of a 1031 exchange and proceeds can not to be used to buy a personal property. A 1031 exchange is intended to grow your investment properties. The way this could possibly be done is the scenarios where these are cash transactions. You could purchase an investment property for cash in the 1031 exchange, therefore avoiding the tax. You could then, after the transaction, take out a mortgage on the investment property and use the proceeds to buy a personal residence.

This could allow you to achieve both objectives while still sticking to the rules of the 1031 exchange.

Send me your questions and I’ll publish ideas and answers. I can't wait to hear your questions. Here’s to your next 1031 exchange.

Stay tuned for the latest edition, delving into the next level of frequently asked questions on 1031 exchanges!

#1031Exchange #TaxSavings #RealEstateInvesting

About the author:

Bethany Williams is the Managing Director of Engineered1031 LLC, a company geared towards helping individuals and family offices better understand how they can utilize 1031 exchange strategies. She is a commercial realtor in Texas and Florida. Should you have a 1031 exchange question, please do not hesitate to reach out.