What Is a 1031 Exchange? A Guide to Financing Your Orlando Investment PropertyLiam Pool
As Orlando property managers, we get excited about the opportunities a 1031 exchange can provide for the investors we work with. If you want to defer taxes on the sale of an income-producing property, a 1031 Exchange can be one of the best ways to do that. You get to defer taxes and increase the value and strength of your rental property portfolio.
But, you have to do it right. There are some complicated conditions and timelines that need your attention. Here’s what you need to know.
What is a 1031 Exchange?
The 1031 exchange is a tax resource that’s named for Section 1031 of the IRS code. Rental property owners can defer the taxes that may be due on the sale of a rental property by investing those profits into the purchase of another rental property.
Most investors expect capital gains taxes when they sell an investment at a profit. But, if you’re willing to use the proceeds from the sale of your property to buy another income-producing property, you won’t lose any of those proceeds to taxes.
Rules for 1031 Exchanges
You have to exchange like properties for like properties when you’re taking advantage of this resource. So, you cannot sell a rental property and avoid taxes by purchasing a vacation home for your family. It has to be income-producing property with a value that matches or exceeds the property you’ve sold.
Here’s an example.
If you sold an Orlando rental property and earned $140,000 in profit, you have to use that $140,000 to buy another rental property or several rental properties. You can sell one single-family home and buy three apartment units. Or, you can sell a multi-family building and buy two single-family homes. The properties don’t have to be exactly alike, but they do have to be investment properties.
Timelines for 1031 Exchanges
There are also deadlines when you’re taking advantage of this tax break. If you’re going to do a 1031 exchange, you have to identify the property or properties you want to buy within 45 days of closing on the property you sold. You also have to close on the new deal within 180 days of selling the original property. The entire transaction must be completed within those 180 days, otherwise you’ll be liable for taxes.
Benefits of the 1031 Exchange
There are several benefits for rental owners who use the 1031 Exchange, and you should talk to your Orlando property managers about the possibilities. This exchange allows you to dispose of a property without paying capital gains taxes. If you’ve wanted to sell a property but you weren’t thrilled about paying the taxes, this is one way to continue growing your investment portfolio.
Other benefits include:
- Increasing the number of assets in your portfolio or diversifying what you already own. When you sell one property and make a lot of money, you can use the proceeds to buy two or three properties instead of just one. This provides you with additional income streams.
- You can save on maintenance costs. If a particular rental property has stopped cash flowing because of all the maintenance and repairs that have been necessary, you’ll be able to take it out of your portfolio and replace it with a newer property that has less expenses attached to it.
- You can stay invested in the real estate market. Many investors hesitate to sell a property because they know it can be expensive to re-enter a growing market. With a 1031 exchange, you can sell that property and continue investing in real estate that will appreciate in value.
We have a lot of experience helping owners and investors succeed with rental properties and investment portfolios. If you have any questions about the 1031 exchange or anything pertaining to property management in Orlando, please contact us at Homevest Management. Our team provides expert Orlando property management, real estate, property rentals, and HOA management. We serve all of central Florida, including Winter Garden, Doctor Phillips, Baldwin Park, Winter Springs, and Windermere.