What is a 1031 Exchange in Real Estate? | Fridays with Fred

    Imagine that you’re a Real Estate investor in Southern California, or elsewhere in the United States, and you currently own a rental property that you want to sell with the goal of using the $200,000 in equity from that rental to purchase another property.

    If you don’t do a 1031 Exchange you will have to pay taxes on the equity that you’ve earned from the sale of your rental property. The taxes that you could expect to pay include Capital Gains and this means that about 33% of your equity would go to paying taxes.

    No investor likes the idea of losing money to taxes, thankfully with a 1031 Exchange, you have the ability to defer Capital Gains that would otherwise be due on the sale of your property so you can purchase another rental property without having to pay that tax bill now.

    Getting Started With a 1031 Exchange

    To set up a 1031 Exchange you will first need to contact a 1031 Exchange Facilitator; these companies specialize in 1031 Exchanges, are experts at the tax code, and can legally help you set up a 1031 escrow account.

    When setting up a 1031 Exchange make sure that you take the time to research companies online and confirm that they are reputable because the State of California’s Franchise Tax Board (FTB) has recently been cracking down on 1031 Exchanges that have been more “liberal” with their approach.

    It’s best to use caution and make sure you choose the right company who is proactive and has stayed current with 1031 Exchanges so you can have confidence that yours will be created professionally and legally.

    How Do 1031 Exchanges Work?

    With a 1031 Exchange, you will have 45 days to “nominate” three potential replacement properties and then you will have up to 180 days total to acquire that replacement property.

    Once a replacement property has been identified the aggregate value of the replacement property must not exceed 200% of the relinquished property.

    Learn More about 1031 Exchanges

    To learn more about 1031 Exchanges, or to view homes for sale in Southern California, contact Fred Sed Realty today by calling us at (800) 921-9231 or connect with us through our website.

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