Investing in real estate property promises great returns, which is why an increasing number of high net worth individuals are turning to real estate investment opportunities. Having said that, investors need to understand that selling an investment property for more than its purchase price can carry a hefty capital gains tax. Complying with 1031 exchange rules of the IRS regulations, however, can help save some of the taxes. As an investor, you need to “reinvest” in a new property, which would make the transaction an “exchange”, rather than a sale. This blog post covers the basics of 1031 exchange rules, to help you with compliance and attaining your investment goals.
Must be an Investment Property
The primary requirement for a real estate investment to qualify under 1031 exchange rule is that both properties should be investments. This means homeowners selling their personal homes do not qualify.
Value of New Property Should Exceed the Old Property
To enjoy benefits of the 1031 exchange rule, the value of the property you’re buying should be equal or greater than the one you’re selling. Paying less for the new property may force you to pay taxes on the difference.
Rules and Regulations
During a 1031 exchange, the money you make from selling a property is held in an escrow account, which is an independent account monitored by a third party. The money is inaccessible until you identify a new property in which you wish to invest. You will get 45 days to identify a new property and the purchase must be complete within 180 days. Since real estate investments are unpredictable and can take time to execute, you have the option of finalizing multiple properties. This will increase chances of meeting the deadline to buy a property under the 1031 exchange rule. There are certain limitations and you are required to follow a few more rules:
As the name suggests, you can only identify up to three potential properties you wish to buy.
200 Percent Rule
According to this rule, you can identify any number of replacement properties but the combined value of the properties should not exceed 200 percent of the one you sold.
95 Percent Rule
Conforming to the 95 percent rule allows you to ignore the 200 percent rule and identify any number of properties in exchange for any amount but you will have to pledge 95 percent of the aggregate value of the properties.
The Bottom Line
Understanding and exercising the 1031 exchange rule can be complicated, which is why you need a reputable investment services firm in USA to help guide the way. FIG Tree Capital Ventures LLC is one such firm. A trusted investment services firm in the USA with specialization in identifying, evaluating, and acquiring promising real estate investments, FIG Tree has a team of dedicated investment consultants who can help you create long-term cash flow and asset appreciation, and understand the 1031 exchange rule. If you wish to learn more about real estate investments in the USA or or discuss how we can help with 1031 Exchange rule compliance, get in touch with one our investment consultants by filling out our contact form or calling (866) 304-9194.