As per the Securities and Exchange Commission (SEC), to qualify as an accredited investor, a person must have an individual income of more than $200k per year or a joint income of $300k. Many real estate investment structures accept only accredited investors, and non-accredited investors can’t invest there. However, it isn’t the case with 1031 exchanges. Anyone can do a 1031 exchange if they meet its requirements. An investor doesn’t need to maintain a specific wealth to qualify for a 1031 exchange. The IRS only evaluates the investor’s intention behind the transaction.
When can you do a 1031 exchange?
Whether your property has reached depreciation or you want to get rid of the management responsibilities, 1031 exchange can be the solution for all your worries. A 1031 exchange (Section 1031) is an arrangement that allows investors to exchange an investment property for another like-kind property while deferring capital gains taxes. Investors choose 1031 exchange because it lets them save millions in taxes. However, to qualify for a 1031 exchange, an investor must abide by the rules established by the IRS. For example, for an exchange to qualify as a 1031 exchange, both relinquished and replacement properties need to be like-kind. Private properties don’t qualify for a 1031 exchange. Hence, you can’t exchange your primary residence for an investment property.
Things to remember while doing a 1031 Exchange –
• A 1031 exchange allows tax deferment, and it isn’t tax-free. However, you can defer capital gains tax as long as you want.
• You must involve a Qualified Intermediary in your 1031 exchange. It’s impossible to do a 1031 exchange without the participation of a Qualified Intermediary.
• The value of the replacement property must be equal to or greater than the value of the relinquished property.
• Both relinquished and replacement properties must have the same debt.
• Upon closing on the sale of the relinquished property, a 1031 exchange investor gets 45 days to identify one or more potential replacement properties. This time frame of 45 days is known as the Identification Period.
• Once you’ve successfully identified a replacement property, you must acquire the same before your exchange period ends. Every 1031 exchange investor gets 180 days (exchange period) in total to complete their exchange, which begins the day the relinquished property is sold.
Why should you plan your 1031 exchange in advance?
It’s always better to plan everything in advance, especially when you’re doing a 1031 exchange. 1031 exchanges have strict deadlines, and no extension is given in case an investor fails to complete their exchange within the specified time. You may think that a period of 180 days is more than enough for closing a 1031 exchange. However, sometimes finding a replacement property requires more time due to a lack of buying options. That’s why you must plan everything before entering a 1031 exchange agreement.