You can use a Section 1031 exchange for rental property. In fact, rental properties are among the most common types of real estate used in 1031 exchanges. The primary benefit is that a Section 1031 exchange allows you to defer capital gains taxes on the sale of rental property by reinvesting the proceeds into another "like-kind" property that is also used for business or investment purposes.
To find out if a 1031 exchange for rental property is right for you or to begin developing your strategy with our 1031 exchange intermediary team, contact us today.
Key Requirements for a 1031 Exchange with Rental Real Estate
- Property Must Be Held for Investment or Business Use:
- To qualify for a 1031 exchange for rental property, the property you’re selling, as well as the property you’re acquiring, must be held for business or investment purposes. This means rental properties qualify, as they are considered investment properties.
- Properties used primarily for personal use, such as your primary residence, do not qualify for a 1031 exchange.
- Like-Kind Requirement:
- The replacement property must also be real estate intended for business or investment purposes, but the definition of "like-kind" is broad. For example, you could exchange a single-family rental home for a multi-family property, an office building, or even a piece of undeveloped land held for investment.
- Timing Rules:
- 45-Day Identification Period: You must identify the replacement property within 45 days after the sale of the relinquished (old) property.
- 180-Day Completion Period: You must close on the replacement property within 180 days of the sale.
- Use of a Qualified Intermediary:
- To avoid "constructive receipt" of the funds, which would trigger capital gains taxes, a Qualified Intermediary (QI) is required to hold the sale proceeds and facilitate the exchange. The QI handles the funds and completes the necessary documentation to meet IRS requirements.
- Equal or Greater Value Requirement:
- To fully defer capital gains taxes, the replacement property should be of equal or greater value to the relinquished property, and all proceeds from the sale should be reinvested.
Example of a 1031 Exchange for Rental Property
Suppose you own a rental condominium that you want to sell and defer capital gains taxes. Using a 1031 exchange for rental property allows you to sell the condominium and then use the proceeds to purchase a duplex or an office building, so long as the new property is also used for investment. The result is you defer taxes on the sale of the condominium and continue to invest in rental real estate.
In summary, rental real estate is well-suited for a Section 1031 exchange, allowing you to defer capital gains taxes by reinvesting in another like-kind property that you intend to hold for business or investment use.
Get Started On Your 1031 Exchange for Rental Real Estate
If you’re looking to maximize the potential of your rental property investments through a 1031 exchange, you’re in the right place. A 1031 exchange allows you to defer capital gains taxes on the sale of a rental property, giving you the opportunity to reinvest in a like-kind property and grow your portfolio without losing capital to taxes.
Our team of expert 1031 Exchange Intermediaries can help you navigate the process, ensuring compliance with all 1031 exchange rules and developing the best tax strategy for your rental property investments. Contact us today to get started and take full advantage of the benefits a 1031 exchange for rental property can offer!
