Understanding the 1031 Exchange. Market Update – 5/13/2022

I’m going to get right to business this week because the topic of 1031 exchange, even when kept simple, is a bit long winded. Know that I am a phone call away if you want more information on 1031, or anything having to do with wealth building and preservation. In addition to over 30 years of real estate and personal investing experience, I was a financial planner for 4 years and I truly enjoy helping people plan for a prosperous future. If I don’t have the answer, I will refer you to someone on my advisory team that does.

 

• A 1031 exchange allows you to take the proceeds of the sale of an income property and invest into another income property, of equal or greater value, without paying taxes on the profit (capital gains).
  
  
• Why would the government do this? This allows you to have more money to invest into another property, that will potentially make a higher profit for which you will owe more taxes and the government will therefore collect a larger amount. Think of the government like a forced investment partner. The more money you make, the more they collect.
  
  
• Only income properties are eligible. Your primary residence already has an exception (section 121) from capital gains of $250,000 per individual or $500,000 for a married couple.
  
  
• A qualified intermediary or 1031 exchange accommodator, must hold and handle the funds from one property to the next. I have excellent resources, if you need someone please let me know.
  
  
• You have 45 days from the closing of the 1st property to identify 3 properties that you are potentially purchasing.
  
  
• You have 180 days from the close of the 1st property to close on the new property.
  
  
• If you decide to sell an income property and cash out or use the profit for something other than another investment property you will then pay the capital gains tax.
  
  
• You can continue exchanging and upgrading properties throughout your life without paying capital gains tax as long as you follow these guidelines.

• Tax liabilities end when you die. In other words your heirs do not have to pay your capital gains!
  
  
• The term like-kind, as in “You must exchange the existing property to a property of like-kind.” is often misinterpreted. Like-kind just means exchanging real property for real property, meaning you can exchange a single family rental property for an office building or apartment complex, warehouse, or even vacant land.
  
  
• Reverse Exchange: you can buy a replacement property before selling the old one and still qualify for a 1031 exchange. The new property has to be held by an exchange accommodation titleholder and the transaction completed within 180 days after the replacement property was bought.
  
  
• You can do a 1031 exchange on a primary residence or vacation home, as long as you convert it into an income property by limiting your personal use to less than two weeks per year and renting to another person for 14 days per year.
  
  
• You can do a partial exchange: if the property you purchase costs less than the profit amount, you only pay capital gains on the difference between the two properties. This amount is referred to as “the boot”.
  
  
• If you are unable to find a property within the 180 period you can take all or part of the capital gains and put it into a Delaware Statutory Trust. This combines your investment with others into a larger, usually commercial, development that also qualifies for the 1031 exchange. For more details on this, reach out to me and I’ll put you in contact with reputable companies that can assist you.

I didn’t want to overcomplicate this to I tried to keep it brief here but there is so much more I can share with you so please reach out if you are considering an exchange. Your Realtor should not only be someone you trust in knowing the real estate market but also in wealth building, preservation and management. At the Zager Group, we don’t take this responsibility lightly. We are committed to continuously learning and sharing about this topic and other ways to make wise choices for our future and the future of our friends and clients. We pride ourselves in being experts in this field. If someone you care about needs guidance or recommendations, please share our contact information as we are honored to be able to help!

 

We had 1 new condos and 4 new homes come onto the market this week. We currently have 13 active condos ranging from $495,000 to $1,250,000; the median condo price is $799,000. We currently have 34 active homes on the East Shore ranging from $1,128,000 to $35,000,000 with the median price of $2,922,500. We are yet to see the typical seasonal increase in inventory so our market remains as tight as ever! Here’s a year to date local update:

 

• Total Sales YTD: Condos: 42 | Homes: 35
  
  
• The Median Sales Price: Condos: $695,000 | Homes: $1,700,000
  
  
• Number of Sales Over $1 Million: Condos: 11 = 26% | Homes: 31 = 89%
  
  
• The Highest Priced Sale: Condos: $5,665,500 (Tahoe Beach Club) | Homes: $32,000,000
  
  
• Median Price Per Square Foot: Condos: $507.88 | Homes: $628.13
  
  
• Median Days on the Market: Condos: 82 | Homes: 92

If you would like to receive our in-depth market update or would like an evaluation of your property’s value we would love to hear from you! We’ve put together some information below that we think you’ll find useful. If you have anything you want to share with our community please let us know so that it can be included in future newsletters.