Multiple benefits available to rental property owners from a Section 1031 Like-Kind Exchange.

Is a 1031 exchange (like-kind exchange) something you’ve been pondering with regard to your rental real estate investment?   A significant tax benefit from transacting a 1031 exchange results in deferring taxes on the gain from the sale until a later year – when the taxpayer ultimately sells the replacement rental property or properties in a future year.  In addition to the significant tax benefit there are a few other advantages of selling your rental property through a 1031 exchange:

1. Diversification: Restructuring your investments.  Examples of diversification include by geographic regions, residential rental for commercial rental, single family rental for multi-family rental, single family rental for two single family rentals.
2. Leverage: Re-investment without loss of capital (that would result from capital gain tax paid on an investment sale) into a higher valued property or multiple properties with the investment potential for higher returns on the investment.

There is a strict timeline which must be met when entering into a section 1031 exchange.  First the replacement property must be identified within 45 days of the sale date of the original property.  Second, the purchase of replacement property must occur within 180 days of the sale date of the original property.  Also, the entire transaction, sale of the original property and purchase of the replacement property, must be transacted through a qualified Intermediary – an independent third party that facilitates the transactions by holding the original property sale funds and then transfers the funds to the replacement property seller to complete the 1031 exchange with the purchase of the replacement property.

A few final items to note.  Only business properties qualify.  1031 exchanges do not apply to the sale of your personal residence and purchase or a replacement residence.  And generally, you will need to purchase a replacement property of equal or greater value than the property being sold.  Cashing out will result in a portion of the transaction being a taxable capital gain to the seller.