This is not financial advice. Everything below is strictly Belloise Realty’s opinion and general information, not a recommendation for your situation.
If you sell an investment property on the coast at a gain, a 1031 exchange may let you defer the tax by buying another investment property. The rules are strict and the deadlines are short. Here is an overview of how it works so you can have an informed conversation with your tax adviser.
Key takeaways
- A 1031 exchange can defer gain when you exchange real property held for business or investment for like-kind real property.
- You have 45 days from the sale to identify replacement property and 180 days to close on it.
- Your main home doesn’t qualify. Vacation homes have special limits.
- A qualified intermediary holds the money. If you touch the funds, the exchange can fail.
The timeline
What qualifies
| Usually qualifies | Usually doesn’t |
|---|---|
| Rental condos and homes held for investment | Your main home |
| Commercial and business real property | Property held mainly for resale, like flips |
| Land held for investment | Personal property, since 2018 |
Vacation homes
A beach condo you also use yourself isn’t automatically an investment property. The IRS has published a safe harbor, Revenue Procedure 2008-16, with tests for rental days and personal use before and after an exchange. If you use the property personally, ask your adviser how it applies.
Watch out: Missing the 45 or 180 day deadline, or receiving the sale proceeds yourself, can make the whole gain taxable. Line up a qualified intermediary before you list.
Our opinion
In our view, a 1031 exchange can be a useful tool for owners moving from one rental to another, but it only works with planning. Start talking to your tax adviser and an intermediary before you sign a listing agreement, and start looking at replacement properties early. Our capital gains exclusion guide covers the main home side, and our rental cost guide helps when weighing a replacement.
- Talk to a tax adviser and choose a qualified intermediary.
- Build the exchange into your listing and purchase contracts.
- Shortlist replacement properties before you close the sale.
- Browse our listings and our condo building guides for ideas.
Not financial advice: This is not financial advice. It is strictly our opinion, for general information only. Talk to a licensed financial adviser, accountant or attorney before making investment decisions.
Planning a sale and a replacement purchase? Contact us.
Sources
- IRS, Instructions for Form 8824, identification and exchange periods.
- IRS, Revenue Procedure 2008-16, safe harbor for dwelling units.
- IRS Form 8824, like-kind exchanges.