10 Nov 1031 Exchange, San Diego Real Estate
How it Works with Rental Properties
When a 1031 Exchange Makes Sense
The Advantages of Owning Rental Property
A 1031 exchange allows a rental property owner to sell any type of rental property and defer the taxes on any profits. This is just one of advantage a rental property owner gains when investing in rental properties. Other advantages to owning a rental property include, tax advantages, income generation, building a profitable portfolio and more… on the income side of things there are three broad types of income a rental property owner can generate:
- Earned Income
- Portfolio Income
- Passive Income
On the tax side of things… owning a rental property gives you many favorable tax benefits such as depreciation to save on taxes and the ability to do a 1031 exchange. A 1031 exchange allows a rental property owner to sell his or her rental property and defer the taxes on any profits made and recaptured depreciation.
By deferring the tax, the rental property owner has more money to invest in another property and postpone the gains from recaptured depreciation…
What is a 1031 Exchange?
A 1031 exchange is a real estate transaction involving two like properties, one is sold and one is purchased within a certain timeframe. A rental property will qualify under a 1031 exchange because the IRS considers a rental property as one that is held for productive use in trade or business. One might consider a 1031 exchange when selling a rental property for the purpose of moving the profit and recaptured depreciation to another similar property without paying taxes.
Under IRC Code Section 1031 the IRS explains,
Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free. (IRS, 2008, Para. 1)
Please Note: At Rancho Mesa Properties, our office consists of property managers & real estate agents. We are not accountants or tax attorneys and want to explicitly state that this article is not intended to be used as tax or legal advice.
1031 Exchange, How it Works with Rental Properties
Rental property owners who are looking to sell must consider these factors before listing their rental property.
1. The taxes you must pay on any profit made, or put simply capital gain taxes become due when you sell your rental property for more then you invested.
2. Payment of recaptured depreciation.
a. Although this is a huge advantage as it relates to tax advantages.
b. It can quickly become a disadvantage when selling your rental property.
i. Recaptured Depreciation: rental properties owned for several years can equate to a huge tax bill when selling.
c. 27.5 years equals the amount of time most rental properties depreciation can be written off. Once it is fully depreciated this tax advantage goes away.
A rental property can be sold without paying taxes on the profit or recaptured deprecation as long as it meets the criteria specified by the IRS. Put more simply, when you complete a 1031 exchange, you can sell your depreciated rental property without paying taxes then turn around and buy a new one that comes with a brand new depreciation schedule.
Please note: At Rancho Mesa Properties, our office consists of property managers & real estate agents. We are not accountants or tax attorneys and want to explicitly state that this article is not intended to be used as tax or legal advice.
When a 1031 Exchange Makes Sense
The reason for completing a 1031 exchange can differ from person to person. Here are a few insightful tips to help you recognize whether or not a 1031 exchange makes sense for you…
- Upgrade: use a 1031 exchange to move from a duplex to a triplex.
- Fixer Uppers: with great rental income Some low-priced fixer uppers need capital improvements to realize their leasing potential… unfortuntately that means you have to have a lot of cash to do so.
- Use a 1031 exchange, to sell a rental property of higher value then apply the difference in build-to-suit
- Percieved Opportunity: you may consider a 1031 exchange when you feel there is more opportunity in a commercial property versus a rental property.
- Retirement: you may consider a 1031 exchange when you are starting the winding down process. The truth is, being a landlord takes a lot of time and resources to ensure they are running properly and it is business as usual.
- Use a 1031 exchange to buy low-maintenance land
- OR, call a company like Rancho Mesa Properties to manage your rental properties
There are many other reasons for completing a 1031 exchange… it is a matter of why, how and selecting the right 1301 exchange team of professional services that can help you get there.
Whether you are looking to buy your first home, second home, investment in rental property or need help finding the right property for a 1031 exchangeRancho Mesa Properties has San Diego Real Estate listings to fit your unique needs.
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About Rancho Mesa Properties
Rancho Mesa Properties specializes in San Diego Real Estate and Property Management Services.
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At Rancho Mesa Properties, our philosophy is to make every client feel like they are the most important client we have!
Our team listens carefully to each client ensuring they feel listened to and heard. Our Mission will always be to grow one-to-one relationships with everyone we meet.
We promise, to provide you with real estate and property management solutions that fit your unique needs and deliver a level of service that makes you feel important because the truth is… you are!
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