A 1031 exchange is a tax break recognized under Section 1031 of the U.S. Internal Revenue Code. Real estate investors can use it to defer capital gains taxes and depreciation recapture otherwise incurred when selling one investment property and reinvesting the capital into another investment property.
To qualify for a 1031 exchange, you must sell your investment property and reinvest the proceeds in properties of like kind and of equal or greater value within certain time periods established by law.
Using a 1031 exchange can be an effective way to leverage an existing investment to upgrade to one with a better performance outlook—and, as a result, grow your portfolio. For example, you may be looking for:
Here’s an example that shows at a high level how a 1031 exchange can help investors access more capital to grow their portfolios:
with a $200K cost basis and sells it for $400K after 5 years, during which she claimed straight-line depreciation of $7,273 per year (or $36,365 total depreciation). Her income is between $41,675 and $459,750, placing her in the capital gains bracket of 15% in 2022.
Without a 1031 tax-deferred exchange
|Net cash received $400,000|
|Capital gains on profit $30,000
($200,000 x 15%)
|Depreciation recapture $9,091
($36,365 x 25%)
|2022 tax liability -$39,091|
|Available to reinvest $360,908|
With a 1031 tax-deferred exchange
|Net cash received $400,000|
|2022 tax liability -$0|
|Available to reinvest $400,000|
As with all things tax related, a 1031 exchange has strict rules and timelines. For instance, you only have 45 days to identify a replacement property and 180 days to close escrow on it after selling the original property. However, the benefits could be worth the effort.
Finding a replacement property (or portfolio of properties) within the strict time limits is one of the biggest challenges of a 1031 exchange. And it’s one of the biggest advantages of working with Roofstock.
We’re experienced in sourcing single-family rentals (SFRs) with investors in mind.
We also provide the financial data that helps investors make more informed decisions based on the numbers, not emotion.
Let’s connect to discuss how we can help you quickly find options to facilitate your 1031 exchange, including recommendations for financing.
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from the IRS
The qualification of a transaction under Section 1031 of the Internal Revenue Code requires meeting numerous statutory, regulatory, and other conditions and involves factual issues and situations that are not and cannot be known to Roofstock. Any investor seeking to acquire replacement property in connection with a transaction intended to qualify under Section 1031 must consult his or her own tax advisor regarding an acquisition of a replacement property and the qualification of the transaction under Section 1031.
No party seeking to acquire replacement property in connection with a transaction intended to qualify under Section 1031 may rely on Roofstock, its affiliates, its employees, or its agents for any tax advice regarding the treatment of a transaction under Section 1031. No representation or warranty of any kind is being made by Roofstock with respect to the ability of any party to meet the qualification of a proposed “like-kind” exchange under Section 1031.