Since the day America got its new president, rumors about 1031 exchanges getting closed down started circulating thick and fast. In a few of his election campaigns, U.S. newly elected president, Joe Biden, had expressed his willingness to scrap investment policies that help real estate investors save taxes and divert the funds to other services. If you are also skeptical about the future of 1031 like-kind exchanges, there isn’t much to worry about. The market experts believe the unique tax saving investment law isn’t going anywhere any soon.
How profitable are 1031 exchanges for real estate investors?
If a real estate investor is a magician, a 1031 exchange is their magic wand. A magic wand that can help you save millions in taxes. Section 1031 of IRC or a 1031 exchange lets you defer up to 100% capital gains tax, which you pay on selling real estate. All you need to do is find a like-kind replacement for your previous property and reinvest the sale proceeds in it. Doing so will enable you to defer the taxes for the transaction. Basically, you can sell any non-performing asset and buy an income-producing property of the same or more value. THERE IS NO STOPPING!
1031 Exchange Ideal Replacement Options
A like-kind investment requires you to invest in similar properties, which are investment properties. You cannot use a 1031 exchange to save taxes on the sale of your residence. Only income-producing assets qualify for 1031 exchanges. One of the easiest ways to ensure you complete the transaction on time is to invest in pre-packaged 1031 replacement options like DSTs and TICs. DSTs are private trusts that own and manage investment properties. You can invest your sale proceeds in one of the DST properties and become the co-owner of that property.
A 1031 exchange should be planned in advance.
It is a wise decision to make an early start when it comes to 1031 exchanges. The 45-days identification period could end in a blink. To successfully defer the capital gains tax, you must identify the new property and acquire it within the timeframe specified by the IRS (45 days to identify a property and 180 days to complete the transaction).
Is it the right time to do a 1031 exchange?
Surely, it is. Nowhere in public, has our president mentioned explicitly scrapping 1031 exchanges. It’s an assumption that investors would no longer be able to use Section 1031 of IRC to defer capital gains tax, and assumptions could go either way. For the time being, 1031 exchange investments are legal in the United States as they were yesterday.