Florida Real Estate Law: The 1031 Exchange

November 20, 2019

Tax-deferment strategies allow investors to defer state capital gains and recaptured depreciation taxes. Florida is the ideal place for a 1031 exchange; its strong tourism industry makes it an excellent place to own a vacation rental or investment property. To benefit from a 1031 exchange, you have to meet certain requirements and timelines.

What Is a 1031 Exchange?

Under section 1031 of the IRS Code, an individual can defer capital gains taxes on the sale of an investment property. To do this, the individual must use the profit from the first sale to purchase a like-kind property.

This opens a number of doors for investors. You can change your investment strategy without incurring a huge tax bill. Investors can also change their geographic focus and move to a better real estate market without the tax burden.

How to Do a 1031 Exchange

To enjoy the benefits of a 1031 exchange, you must have a property in mind that is similar to the one you are selling. A like-kind property is one that is of the same nature or character as the original property. This doesn’t mean you have to use the proceeds from an apartment building to buy an apartment building; most of the time, different types of real estate are still considered like-kind property.

It’s also important to note that this type of exchange is only available for investment or business property. You cannot use it to change your primary residence.

Types of Exchanges

There are several types of exchanges that are considered a “1031 exchange.” Options include:

• Simultaneous: This exchange occurs when the replacement property and original property close on the same day. A two-party trade involves both parties exchanging deeds. You can also use a three-party exchange to pass funds through an accommodating party.
• Reverse exchange: If you go this route, you pay for a replacement property through an exchange accommodation titleholder before you actually choose the property. You must sell the original property within 180 days to gain the tax benefits of a 1031 exchange.
• Delayed exchange: This is a common option for investors. It involves selling the original property before purchasing the replacement property. The proceeds of the sale must be held in a binding trust while the investor finds a like-kind property.

If you are interested in changing up your real estate investment strategy or moving to a more profitable location, a 1031 exchange could be an excellent option for you. Learn more about your options now by calling Schlegel Livingston, LLC at 954-771-8929.