On today’s new episode of the Wiser Roundtable Podcast, Casey Smith is joined by Tom Townsend, realtor with Townsend Realty Group, a KW realty partner, and by Jordan Sute, CPA, from Sute CPAs. They discuss how 1031 exchanges work, and talk through why they are a great option for some people.
First, we advise that you talk to a CPA that knows what they are talking about. There is a formal process for 1031 exchanges that you must follow. Receiving any of the cash qualifies of a taxable gain. Get a qualified intermediary to set it up to where they get the cash. You will want to roll the cash into up to 3 qualified properties within 75 days. A qualified intermediary is a company that will hold the money for you in an ethical way. All of this needs to be set in place before closing. In order to avoid the capital gains, the cash cannot touch your account.
Invest in Multiple Properties
You can use the gains off of one revenue property and buy two. Therefore, creating two revenue streams. The property has to be in “like-kind” which is nuanced and also vague, so that is why you want go through this process with an expert. There are closing costs that can be eligible to roll into it as well.
What’s Not Allowed
You used to be able to do this with airplanes, but you can’t anymore. You cannot do a 1031 exchange with stock or bonds. You also can’t do this if you are flipping a property (unless you are renting the property).
Rules For a Mortgage
Any cash that is coming out to you because you assumed less of a mortgage is capital gains tax. Therefore, you can’t use a mortgage to disguise profits. The trade has to be of equal or greater value.
For example, say that you purchased a home in Hilton Head for 2 million dollars, and then decide you want to purchase a home in Seaside for 8 million dollars. You could claim the Hilton Head home as a rental property and do a 1031 exchange, take the gains, and purchase a home in Seaside as long as you keep renting it out. This can also be done on your primary home.
Is now a good time for a 1031 Exchange?
Right now is a great time to trade up on real estate. Capital appreciation is the name of the game. Historically, we have always looked at cash flow. How much cash will I get every month from this investment? If you want to start doing rental properties, you will need to network and partner up with a realtor.
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