How to Use a 1031 Exchange

Did you know that the 1031 Exchange helps everyone from the novice to the professional keep money out of Uncle Sam’s pocket legally?

The 1031 Exchange is an integral part of our “retirement” plan. Unlike stocks, the IRS provides a method for you to move your houses around the country without having to pay capital gains or repay depreciation as long as it is a like kind real estate exchange.

What is a 1031 Exchange?

It is a program that allows you to sell your house or real estate holdings in one area and invest the proceeds into another area. This is great for someone who wants to upgrade or relocate their current holdings to another area or turn one house into multiple houses. There are strict rules to this program so definitely contact a 1031 Exchange coordinator in your state to provide more information and a CPA to discuss tax repercussions.

Does this Pertain to the Average Investor?

I just completed a 1031 Exchange for family, selling their townhouse in Maryland and turning it into three houses in California. We were able to triple the gross rent while trading out a depreciating asset in an older neighborhood to an appreciating asset in a new area. This sale increased their gross rent 2.94 times with no tax or capital gains. This is the family’s second 1031. The original house was first purchased 25 years ago. You can’t say it doesn’t pay to be an accidental landlord.

It is also the perfect consolidation tool!

We are picking up houses all over the United States based on where my husband is stationed and also where houses make sense for pure investments. We also have to consider being able to manage from a distance; long distance costs more money than local landlording.

Therefore, we plan on selling all of our houses and relocating them utilizing the 1031 Exchange into the area that we finally choose to settle down. The 1031 lets us sell the profits and reinvest in the more expensive rentals in our final area. We can do this without any tax ramifications. Our goal is to amass as much capital through diverse investment, eventually relocating them near us for ease.

Turning a Rental into a Personal Property

While definitely more complicated, it is also possible to turn your rental property into a personal property without repaying depreciation or capital gains. Under current federal law, you can sell a rental and roll it into an investment, which requires 20-25% down. By law, the new property is required to be a rental property for two years. Once it has been a rental property you are allowed to move into it. After two years of living in the house, it now qualifies for the personal property deduction (250k single, 500k married).