Simply put, a 1031 Exchange is a method by which you can defer paying capital gains tax when you sell one investment property and buy another “like kind” property.
That’s a huge advantage, since avoiding capital gains tax on the profit from the sale of one property gives you more money to roll into the acquisition of the next property. In effect, it becomes an interest free, no-term loan from Uncle Sam.
And… If you’re working to build a significant property portfolio for your heirs, there’s an even greater advantage to using a 1031 Exchange, because that tax can be deferred forever.
Interestingly, the 1031 Exchange is often overlooked by San Diego investors.
Why should a San Diego real estate investor consider using a 1031 Exchange?
- To defer capital gains tax
- To leverage investment potential
- To “move up” to a larger San Diego real estate investment property
- To consolidate multiple San Diego investment properties
- To diversify into multiple San Diego investment properties
- To physically relocate holdings to a different area
- To change property types among residential, commercial, retail, or industrial properties
- To gain relief from property management by buying into an institutional-type property as a Tenant In Common
Why Don’t San Diego real estate investors use the 1031 Exchange more often?
Probably because the rules and regulations are complex. It is not a do-it-yourself project, but must be used with the aid of an experienced team consisting of a real estate agent, a tax advisor, and a Qualified Intermediary. Deviation from the rules will result in tax liability, so your team must be top-notch. Here’s an overview of the rules…
Some avoid 1031 Exchanges because they don’t know the rules have changed. Here’s a brief history.
A second reason may be the misconception over the definition of “like kind.” This is no doubt due to the fact that the definition has changed over the years.
At one time it meant you could only exchange a 2-story brick apartment building for another 2-story brick apartment building. Now you can exchange that apartment building for a retail building if you so choose. Here’s what “like kind” means today…
Lastly, some may still believe that the word “exchange” indicates an agreement between two parties who want to trade holdings. Today, that is far from the case. Read more…
And if you’d like to discuss it with a San Diego real estate investment specialist…
Call 619-929-1413 – we’ll be glad to talk with you.