When you exchange one commercial real estate property with another, you may be able to trigger what is known as a 1031 exchange. This is a useful tool in real estate investing that allows owners of investment properties to sell and buy commercial property while minimizing their tax burden.
1031 Exchange Is Only Applicable to Commercial Properties
It is important to note that 1031 exchanges are not applicable to primary residences. However, there may be a possibility to exchange a former vacation home under very specific conditions. For example, if you had a primary residence and decided to convert it to a rental property and have had at least one tenant living there for 12 months, you should be able to exchange it for another rental property. You must be able to prove to the IRS that you used the property for business purposes.
How it Works
Let’s quickly take a detour of how you can initiate a 1031 exchange. Step 1 is to choose a qualified intermediary to help you facilitate the exchange. Ask a property management consultant to help you identify a suitable middleman. This person will hold on to the proceeds from the sale of the property while you search for a new one.
Note that you only have 45 days from the day to sell the multi-family residential property and find a replacement property. There are no extensions that you can apply if you miss the deadline!
Once you find a property you like, you could use the funds from the sales of the investment property to buy the new property. However, you only have 180 days from the day you sell the property to close on the replacement property.
Once this is done, you will have to fill out Form 8824 to report the exchange of the investment properties. We recommend working with a tax advisor to help you deal with the details because it can be stressful to fill out the form yourself.
1031 Exchanges FL, NY, PA, NJ, MD, DE
The property that you just acquired under a 1031 exchange cannot be used as your primary residence - at least for now. The IRS requires you to rent the property to another person for 14 days or more. Due to the technicalities involved in a 1031 exchange, it is highly recommended to work with an experienced property manager who has foreseen many swaps.
This should help you stay on the right side of the law and avoid making mistakes, even if you're a seasoned expert in property acquisitions. Contact the team at Milbrook Properties today for more information on investing in real estate.