1031 Exchanges in RI Real Estate

What is a 1031 Exchanges in RI Home Transactions

 

Explain simply how I, as a property owner, may benefit from a 1031 exchange in RI real estate.

A 1031 exchange,especially for real estate agents, needs to be understood so you will guide your client well in this process.  Investment property owners now or in the future need to understand the benefits of these exchanges.

1031 Exchanges in RI Real Estate

Pay now or pay the IRS later

I have to get technical on you I am afraid.  1031 exchange is part of the Internal Revenue tax code which allows for an exchange of ‘like properties’ in order to defer your tax ramifications now.  This can be a very advantageous way to postpone capital gains taxes on your investments in RI real estate sales.

In real estate, a 1031 exchange on property is for ‘like kind’ properties that are in the United States.  It is a sale of one property and the purchase of 1-3 properties of same market value (in total or more) or not more than 200% of sold property or as many properties as desired but at least 95% of the initial first property sale amount.  See why you need a good accountant!

  Why does one do these 1031 exchanges?  First, it can not be done on your primary residence and secondly, you do it because (you got it) there are tax advantages that will SAVE YOU MONEY.  I am not an accountant, so please talk to someone in the field who is up on the current tax law and can guide you financially.

Now I am talking ‘business’ properties not primary residences although there are different kinds of uses for 1031 exchanges (and yes, a secondary residence that becomes your primary can be used at some point in a 1031 exchange).  Let us look at what advantages you can gain by doing this with an investment property.  Why bother you ask?  Well this 1031 section of the IRS code is all about deferring capital gains for the investor. Well you want to be in a lower capital gains bracket when you finally sell investment real estate and you want to take a property gain when your capital gains is the least monetary amount….right now at 15%.

 

 Why pay now when you can pay later at a lower capital gains rate? Right.  1031 exchanges have a very finite time limit point to be aware of and an ‘intermediary’ (third party) usually must be part of any 1031 transaction you do.

What kind of time limits are you talking about? Once you sell your investment property you have 45 days from closing to identify the ‘like kind’ properties. Remember ‘like kind’ property must be exchanged for equal or greater value than the property you are selling, it can not be for less without triggering a capital gain tax.  In addition, the property closing must take place within 180 days of the closing of the first property or within the tax year of the 1031 exchanger (whichever is less).

 

So when you sell one investment property for another you are actually deferring your capital gains to some time in the future which to most people is a wise thing to do.  Since we are talking about ‘investment’ property as such in RI real estate, the capital gains exclusion of $250,000 if single or $500,000 if married does not come into play here (since this capital gain exclusion is only for principal residences).  If at some point you want to make the investment property your primary home, then sell and use the capital gains exclusion, you must as the owner hold it for a period of years first (at least five years).

 

What does this all mean to you as RI real estate investor or business person?
 Talk to your accountant and CPA to ensure you will have qualified property to do it and do it without triggering a capital gains tax now.  I am not a financial adviser but I can certainly help you identify ‘like kind’ real estate properties that will meet your needs.  So call me today at 401.529.7849 and let us talk real estate strategies for you.  There are more little hooks involved in the transaction which is why a good CPA is a must in your corner.

 

I will share some information on this third party (qualifying intermediary in a 1031 exchange) in another post to follow.  So make sure you read and understand the importance of this third party!  Since a Qualified Intermediary is a must  that should be part of the transaction.  1031 Exchanges in RI Real Estate.
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Ginny Lacey Gorman is your go to Rhode Island waterfront and luxury agent for North Kingstown RI real estate and beyond…knowing the geographic area, schools, happenings and important tidbits of local information.  Email me at RiByTheBay@gmail.com to make an appointment to find the investment home that fits your portfolio.
 
Waterfront, oceanfront, luxury and coastal Rhode Island real estate are my specialty but all of RI is my backyard.  When you are in need of a real estate professional and specialist for your buying, selling or relocating needs and an internet savvy marketer who sells RI houses in this real estate market call Ginny at 401.529.7849.

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