Real Estate Investing Using Delayed 1031 Exchanges

Hi, this is Frank Chen with REIClub.com, the only site you need as a real estate investor. Today I've got a quick video on Delayed 1031 Exchanges

There are different types of 1031 Exchanges, today we will be focusing on “Delayed 1031 Exchanges”

What is a delayed 1031 Exchange?

The primary advantage of a 1031 exchange is the preservation of investment capital by deferring payment of capital gains taxes. If you sell property (rather than exchanging it) you must pay taxes on any recognized gain. Capital gains tax is usually 20% to 25% of your gain, plus any state taxes. In a tax-deferred exchange, all your profit (both cash and carry-backs) may be used to acquire replacement property.

The theory behind Section 1031 is that when a property owner reinvests the sale proceeds into another property, the taxpayer's investment is essentially still the same, only the form has changed (e.g. vacant land exchanged for apartment building).

For a delayed 1031 exchange, the IRS allows up to a maximum of 180 calendar days between the sale of the relinquished property and the purchase of the replacement property. Within the 180 day “exchange period,” the investor must also properly identify suitable replacement properties, which they call “like-kind”, within 45 calendar days of closing on the sale of the relinquished property.

Benefits of Using a 1031 Exchange
  • Few techniques available to postpone or potentially eliminate taxes
  • Scale your business up – houses to apartments to commercial
  • Leverage – Deferring taxes, more money available to invest in another property.
  • Cash Flow – Investors can sell a property that is producing little or no income (such as land) and purchase property or properties with greater cash flow performance (such as a retail shopping center).
  • Management Relief – Investors who no longer want to manage high-maintenance properties can reinvest in properties requiring little or no management.
  • Increase Depreciation – Investors can exchange from a non-depreciable property (such as raw land) to a property that can be depreciated.
  • Relocation – If owners move or retire to other locales, they may prefer to relocate property holdings, especially resort properties.
Disadvantages of 1031 Exchange
  • Does not work for all types of transactions – numbers need to work
  • Complex setup process – More than likely will need to consult with tax professional
  • Very strict IRS guidelines and deadlines – if not followed, subject to taxation
  • Additional Costs – Exchange Fees and Hiring a Qualified Intermediary (these are the people who aid in this transaction process, mandatory)
  • If you decide to sell the replacement property – deferred gain is taxable

If you aren't familiar with Capital gain tax, research it so you can fully understand the benefits of a 1031 Exchange.

Every 1031 Exchange transaction is different. Always consult a competent Qualified Intermediary, attorney, or tax advisor to determine how an exchange may best be structured to accomplish your investment objectives.

Again, this is Frank Chen with REIClub.com. Please take the time to leave your comments for this video below and please subscribe to our YouTube channel so you'll be automatically notified when we upload more quick video tips for you. Take care and good investing.

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