“The best way to teach your kids about taxes is by eating 30% of their ice cream.” -Bill Murray
There are a multitude of benefits for your real estate business when you become recognized as a 1031 Exchange expert. At a time when the housing market is experiencing a cooling evolution, knowing how to transact a 1031 Exchange can be a great way to branch out and grow your business. Now could be the perfect time for you to jump into the world of “like-kind exchanges.” Don’t let the tricky two-stepping of a 1031 Exchange scare you away from what could be a lucrative and timely way for you to expand your business acumen. Learn more on how to double your business with 1031 Exchanges:
WHAT IS A 1031 EXCHANGE
For over a hundred years 1031 Like-Kind Exchanges have been a part of U.S. tax law. A 1031 Exchange can be a powerful tax tool that allows investors of business properties to defer capital gains taxes by swapping one “like kind” property for another. It’s true there are many rules that must be observed when using a 1031 Exchange but the advantages to becoming an expert in this field can far outweigh the complexity of learning the rules.
THE BENEFITS OF A 1031 EXCHANGE
There are many benefits of using a 1031 Exchange to both investors and real estate agents.
Investors benefit from like-kind exchanges by legally deferring capital gains taxes, thereby preserving equity that would otherwise be lost to taxes. This gives them more capital to invest in another, usually more expensive property with better returns. Additionally, savvy investors can leverage a 1031 Exchange to buy their future dream house and then turn it into their personal residence later, should they choose to do so.
Agents benefit from transacting 1031 Exchanges by overseeing two transactions that amount to two commissions: one to sell the investor’s property and the other for the purchase transaction of the like-kind property. 1031 Exchanges can also lead to larger transactions, enhanced referrals, and lifelong clients. It can also increase your listings when potential sellers become motivated to sell based on the benefits an exchange can offer, especially when it comes to taxes and estate planning.
CAN A SECOND HOME QUALIFY FOR A 1031 EXCHANGE?
Second homes and rentals can qualify for a 1031 Exchange when certain conditions are met. These include:
- The Seller must have owned the property for 24 months prior to the sale, and
- Within each of those two 12-month periods the homes must have been rented at “fair market value” for 14 or more days, and
- Restricted personal use to the greater of 14 days or 10% of the number of days it was rented at FMV within that 12-month period
- “Safe harbor” for a vacation home to qualify as a Replacement Property requires the seller/exchanger to own the vacation home for 24 months immediately after the exchange and again observe both items (2) and (3) above.
CORE RULES & RECENT CHANGES
- Under the recently enacted One Big Beautiful Bill Act (OBBBA) 1031 Exchanges remain intact and allow investors to defer capital gains when reinvesting in qualifying real estate
- Only real property qualfies for a 1031 Exchange – personal property does not
- IRS deadlines apply: 45 days to identify replacement property, 180 days to close
- To avoid disqualification of a 1031 Exchange proper documentation, compliance and professional guidance are essential
WHAT IS A QUALIFIED INTERMEDIARY (QI)?
With few exceptions all 1031 Exchanges require a Qualified Intermediary (QI) to avoid disqualification. A QI is an independent third party who navigates the details of a 1031 Exchange, in particular the cash proceeds from an exchange. The IRS requires that the seller never touch the money from an exchange so the QI holds the funds in a separate account while the the transaction is consummated.
HOW TO BECOME A 1031 EXPERT
Here are ways you can learn more about becoming a 1031 expert:
- Certified Exchange Specialist (CES): This is the gold-standard for national accreditation and includes a comprehensive exam.
- Residential 1031 Exchange Specialist: This is a targeted online training program (Agent Certifications).
- State Continuing Education (CE Classes): Offered by providers for state-approved CE courses on 1031 mechanics.