Although property owners in Virginia might want to sell their investment property due to cash flow or maintenance issues, if they are looking to buy another property or multiple investments properties in the area, opting for a 1031 exchange can be a better solution.
A 1031 exchange or section 1031 of the U.S. Internal Revenue Service’s tax code states that if individuals choose to exchange one investment property for another, they might be able to defer capital gains or losses that they would otherwise have to pay.
If your property in Norfolk meets the requirements set by the IRS, you are eligible for a 1031 exchange. It allows real estate investors to defer the payable taxes. It also enables them to swap their existing investment property for a better property or multiple properties.
For more details, here are some commonly asked questions about a 1031 exchange.
What is Section 1031 of the U.S. IRS’s tax code?
Also known as the Starker Exchange, the 1031 exchange defers taxes on exchanges of like-kind real estate. In simple terms, it allows real estate investors to defer taxes on profits of properties sold to raise cash for purchasing other properties.
Before 2017, it was possible to secure a 1031 exchange on various properties. However, after 2017, it is only permissible for business properties or investment real estate to be exchanged. The exchange must be carried out promptly and must be reported on Form 8824 in detail. Section 1031 is only beneficial to investment properties and not for personal homes.
How to get started with a 1031 exchange?
To get started, you must first ensure that your Norfolk property qualifies for the exchange. The newly purchased property must strictly be a like-kind property and must be of greater or equal value to your previous property. You should also adhere to the requirements of the exchange. You can opt for one of the following exchanges.
Simultaneous Exchange: You can sell your old investment property and buy another one on the same day. An exchange like so can be conducted with the help of a Qualified Intermediary or a Q.I.
Delayed Exchange: One of the most common exchanges, this helps you purchase an investment property only after relinquishing your previous property within a specified time limit.
Improvement Exchange: Before selling the property, you can make structural improvements and other necessary construction to your property.
Which types of properties qualify under the 1031 exchange?
Only like-kind properties qualify for a 1031 exchange. Although the formal definition of the term is vague, in this context, it refers to investment properties that are similar in nature or the same real-estate type. The properties must also be within the United States, and it is permissible for the properties to be across state borders.
What are the restrictions for a 1031 exchange?
Non-adherence to the terms of the 1031 exchange can result in significant financial losses. Therefore, you must be aware of the following restrictions:
You must be the sole owner of the investment property that you intend to sell.
A 1031 exchange can only be carried out between investment properties.
After you sell your current investment property, you are required to identify a new property within 45 days. You will be required to close on the property within 180 days.
If you opt for a new and cheaper property, you are liable to pay taxes on the price difference.
What is a reverse 1031 Exchange?
In addition to the three types of exchange discussed previously, there is also a fourth kind of exchange that a Norfolk investment property owner can choose, called the Reverse 1031 exchange.
A reverse exchange is when you can buy a new property before relinquishing control over your current property. These transactions are carried out in cash, and you have to relinquish your former property within 45 days, similar to the deadlines of the IRC 1031.
Failure to adhere to these timelines may not directly disqualify the transaction but can result in the exchanger missing out on some of the benefits of the exchange.
Why are 1031 Exchanges only confined to real estate?
Under the Tax Cuts and Jobs Act (TCJA), Section 1031 only applies to real estate exchanges and not to that of personal or intangible property. Since 2018, 1031 exchange has been limited solely to investment properties in real estate. Before passing the TCJA, some swaps of personal property like aircraft, equipment, and franchise license qualified for the exchange.
Although there is no limit to how many times you can perform a 1031 exchange, the IRS may investigate if the exchange occurs too frequently.
The real estate investment market in Norfolk and all of Virginia state is highly competitive. That is why you need a reliable Norfolk property manager to navigate you through the 1031 exchange process.
At Doud Realty Services, our property managers have extensive experience handling 1031 exchanges, with in-depth knowledge of the rules and regulations of IRC section 1031 and can help you properly exchange your Norfolk investment property. For more details, connect with us at Doud Realty Services.