RentSimpli is a full-service San Diego property management company specializing in single family homes, townhouses, condos, mobile homes, small commercial buildings and small apartments. We’re always looking for ways to help our real estate investors maximize the value of their investment portfolios.
The 1031 exchange is a great way to do that. It’s one of the best ways to sell an existing income property that you own, especially if you want to defer the taxes you would have to pay. All you have to do is use the proceeds from your sale to reinvest in another income property.
Let’s take a look at how the 1031 exchange can impact investors in San Diego and their portfolios.
The Basics of a 1031 Exchange
This tax deferment program is named for the IRS code that describes and permits the program.
It allows property owners to defer paying the taxes on any income they earn from the sale of their property by purchasing another like-kind property with the proceeds of that sale.
Here’s an example. Perhaps you sell an investment home that has appreciated quite a bit over the time that you’ve held it, and your capital gains are $350,000. You can take that money and use it to buy another investment property. Then, your taxes on that gain are deferred.
The new property you buy has to be similar to the one you sold. That doesn’t mean you have to buy a property that’s exactly the same. You can sell a single-family rental home and buy an apartment building. It simply has to be one income-producing property for another income-producing property. You cannot use the 1031 Exchange to sell your rental units and then buy yourself a new home that you plan to live in yourself.
Timelines and Requirements with a 1031 Exchange
When you sell your original property, you cannot pocket any of the money that you make. It goes into a separate escrow account that’s managed by a qualified intermediary.
After you close on that sale, you have 45 days to identify a like-kind property that you’d like to purchase. You don’t have to buy it yet, and there’s always a chance that your offer won’t even be accepted on the new property. But, you have to at least identify a property within the 45-day time period.
You need to close on a new property within a total of 180 days of selling the first property. So, your timeline to buy a new property is 180 days; the clock does not restart after the 45-day identification period.
Why This Works with San Diego Rental Properties
The tax deferment benefit is a great reason to use the 1031 exchange, but there are other advantages as well.
For example, you can leverage the property you already own in order to buy something that’s more valuable. Perhaps you are looking to sell a rental home that’s beginning to need a lot of maintenance. If you have a lot of equity built into that property, you’ll have the opportunity to purchase a property that can net you more in rental income. By using this exchange, you increase your buying power and your potential for cash flow and long-term returns.
We can help you navigate a 1031 exchange; contact us to get started and learn more. RentSimpli is a full-service property management company serving landlords, investors and property owners in San Diego & Riverside Counties, including La Mesa, El Cajon, Chula Vista, Santee, Rancho Bernardo, Escondido, Fallbrook, Temecula, and Murrieta.