You may have invested in a 1031 exchange and are now considering converting the property into a primary residence; however, the strict IRS codes and regulations concern you. Dealing with the IRS is stressful, but you can acquire and convert your investment property into a primary residence without incurring the wrath of the Internal Revenue Service.
How Does A 1031 Exchange Work?
A 1031 Exchange, also known as like-kind exchanges, allows real estate investors to swap one of their real estate investment properties (relinquished property) for a property of the same nature, character, or class. It’s important to note that most swaps are taxable as sales, but if a swap meets the 1031 requirements, it allows tax deferral, meaning that the investor won’t have to pay any tax or limited taxes at the time of the exchange.
As defined by the IRS, a 1031 exchange transaction allows you to change your investment type without cashing out or recording a capital gain. As a result, your investments can continue to grow tax-free, and there are essentially no limits on how many times you can do a 1031 exchange. As a result, you can easily roll over your profit from one investment property to another multiple times and avoid paying tax until you decide to cash out several years later.
This is fantastic as it applies even if you make a profit on each swap. Of course, during your cash out, you’ll only have to pay a long-term capital gains rate depending on income, but what does all of that mean for the average investor?
A 1031 exchange involves a simple exchange of one property for another between two individuals. However, the chances of finding a suitable 1031 exchange, in terms of the property itself, are very slim, which is why most of these are delayed. In case of delayed exchanges, a qualified intermediary must hold onto the sale proceeds of your property and reinvest the same funds into a replacement property for you.
Under the 1031 treatment, all money must go to the qualified intermediary, and you must designate at least one property you’d like to acquire. This designation must be submitted to the intermediary, in writing, within 45 days of the sale of your property. However, the IRS allows investors to designate up to three (3) properties as long as they close in on one of them within 180 days of the sale of the old property.
It’s worth noting that these timeframes run concurrently, starting from the day the sale of your previous property closed. Another noteworthy thing is the reverse exchange, in which you transfer the new property to the qualified intermediary, identify your property for the exchange, and close the swap within 180 days after the replacement property was purchased.
1031 property exchanges are reserved for business or investment properties, such as apartment buildings, vacant lots, commercial buildings, and any real property held for investment purposes. Under certain circ*mstances, even single-family personal residences, vacation homes, etc.
You can live in a 1031 property you acquired; it is your property. However, the IRS has implemented certain limitations that would justify all tax deferrals and exemptions provided by Section 1031, so you might not be able to move into your property immediately. For more detail on 1031 Exchanges, don’t hesitate to contact me at https://provident1031.com.
