What Is a 1031 Exchange in Real Estate?

When filling for a 1031 Exchange, one should always know the ground rules that must be followed under the 1031 Exchange Act. The rules of the 1031 Exchange were established by IRC in 1921 and were made to benefit citizens and investors. Under the 1031 Exchange, investors swap properties having the same cash value and type. The real estate 1031 Exchange allows owners to exchange each other’s property, agree to trade, and directly transfer ownership to the other party. The Internal Revenue Services’ main purpose is to keep motivating, encouraging, and facilitating the flow of continuous investments by investors in real estate for capital gain or investment purposes. 

Benefits of 1031 Exchange
As an investor, you can build a diversified and well-managed portfolio of your acquired holdings and real estate properties. With the passage of time, you might plan to buy apartments, residential blocks, or commercial retail shops in malls. The 1031 Exchange gives you ample room to expand your portfolio in various geographical locations. Exchange and acquiring properties under 1031 Exchange helps you defer land taxes on capital gains from your property. You must consult your tax consultant and inform him about the 1031 Exchange during that specific tax year. Your tax consultant would prepare a tax deferral form and file all your paperwork to exempt you from paying capital gain tax. 

Which Type of Holdings Come Under in Like-Kind Real Estate?
While you are making an exchange under 1031 Exchange, you must remember that your relinquished and replaced property must be like-kind. Like-Kind is any property that was bought for investment or business-orientated purposes. An investor can always swap rental homes with commercial shops and spaces. The landowners and farmers can exchange agricultural land for hotels, motels, and much more.

The Following Types of Properties Are Classified Under Like-Kind Real Estate:
1. Farm Land
2. Warehouse Storage
3. Apartments
4. Office Building
5. Retail Store
6. Rental Home
7. Raw Land
8. Hotel/ Motel

How to Go Through With a 1031 Exchange?
It is necessary for all investors who are willing for a 1031 Exchange to consult with their tax and property advisors. Realistic and strategic planning should be carried out before implementing your decisions. One should always ensure that the exchange is the best decision, and then the exchange is executed smoothly. When you find and acquire a new exchanged property, you would be liable to pay Sales Commission, Legal Fees, Finders Fee, Inspection Charges, Transfer Taxes, Homeowners Insurance, Exchange Transfer Fees, Statement Fees, and Notary Fees. Your charges and payables may vary according to the situation, and they would vary with the type of property you acquire. If you have acquired property of a lesser value than your relinquished property, you can reinvest your new property’s capital gain. It can be in the form of major renovations and fixtures applied to your acquired property. It is always smart to consult property advisors, who will help you identify your need and pave your path towards an effective 1031 Exchange.