For those of you unfamiliar, a 1031 exchange gives the real estate investor the ability to sell a piece of property and parlay the proceeds into a “like-kind” property. Here is a quick lay example:
Selling 60K parcel of land that you originally purchased for 40K.
Buyer 100K parcel of land.
The 1031 exchange allows you to replace the sale of the 60K parcel toward the purchase of the 100K parcel. You obviously have to come up with the remaining 40K but the beauty of the deal is you pay no tax on the 20K of appreciation. The taxes will be deferred until the sale of the 100K parcel unless you 1031 again. Think of it as leap frogging to wealth.
One unconventional 1031 replacement property option real estate investors do no think of is converting your investment property to personal use. Impossible you say, it is not “like-kind”….ah…you rent the property for two years to satisfy the investment intent. After the rental period is up the property can be used as your residence and for personal use. Live in it for another 2 years and qualify for tax-free $250,000/$500,000 tax exemption. As long as you use the property for personal use 2 of the 5 years.
* As always this information is not a form of tax, legal advice or a recommendation to use 1031 exchanges.
