Aloha! George Krischke with Honolulu HI 5.
Today, we’re going to discuss 1031 Exchanges. A 1031 Exchange is a powerful tool for real estate investors to re-balance their real estate portfolio. This is to upgrade the quality of their properties, improve cash flow, increase leverage, reduce maintenance or management fees, improve the appreciation potential, etc. All this can be done while minimizing capital gains taxes; or I should say, by deferring capital gains taxes until a later time.
A 1031 Exchange allows an investor to sell one or more investment properties and buy one or more ‘like kind’ investment properties. Now, these have to be investment properties. They have to show up on your Schedule E tax return. This can not be your principal residence. All this can be done while deferring capital gains taxes. Now, ‘like kind’ properties means both, the relinquished property and the replacement property need to be investment properties, and they both need to be located within the United States.
Certain time frames apply, e.g. 45 days to identify replacement property, and 180 days to close, and other rules apply, so it gets a little tricky with the fine print there.
A properly structured 1031 Exchange can help real estate investors build substantial portfolios over time, while deferring capital gains taxes. We have some clients that started off with one little rental property, did a 1031 Exchange, rolled the proceeds into three other properties, and built over time, a substantial portfolio.
Always check with your favorite qualified CPA and attorney to see if a 1031 Exchange is suitable for your individual situation. That’s it for today.
Thanks for watching. ~Aloha.