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Kevin Hummel is with McFerran Law here in Seattle, and he is a certified exchange specialist. Kevin helped me with my 1031 exchange, and he’s here to answer some common questions.
First off, why would you do a 1031 exchange?
In short, we do this to avoid capital gains. The 1031 exchange can save you tens of thousands of dollars. It’s a simple process that happens during the normal closing process. Then, Kevin steps in and works directly with your escrow company.
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The 1031 exchange can save you tens of thousands of dollars.
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What kind of properties qualify for the 1031 exchange?
A 1031 exchange is set up for an investment property. That includes rentals, commercial properties, or properties that you are holding onto for long-term appreciation and value.
How many properties can you exchange? How long is the process?
There is no limit to the number of purchases or sales that happen during an exchange. To keep things more simple, however, consider limiting the number of properties you buy to three. You have 45 days from the close of the sale to identify the properties in the exchange. Then, you have 180 days from closing to complete the exchange. Once you close on the sale, you can use the money you saved during the 1031 exchange to purchase other properties, so long as the values line up.
Can you identify a property that is worth more than the home you sold?
Let’s say you sell your house for $300,000 and identify a $350,000 property in the exchange. Since that property is worth more than $300,000, you can do a partial exchange. In that instance, you would pay taxes on the difference between the two properties. In order to get a full deferral, you need to match the exchange value, which is the sale price minus the closing costs.
The three basic rules for a 1031 exchange are: purchase a property equal or greater than what you sold; use all the proceeds from the sale towards your purchase; and replace the debt that’s paid off on your sale, if you have a mortgage on it.
If you sell a property and decide to buy land, is that still a like-type property?
Absolutely, as long as the land meets the same qualifications as an investment property. Again, that means creating income, being used for a business, or holding the property for long-term appreciation and value.
What happens if you miss your deadline?
You will owe capital gains taxes on the property. The capital gains rate for most individuals is 15%. That is what we are trying to help you avoid.
Do you need a consultation before handling a 1031?
The consultation is not required. If you have a simple question about an exchange, you can call Kevin and talk about it. If you would like an hour long consultation, that will cost about $150 to speak with Kevin or one of his fellow attorneys.
If you have any further questions for Kevin, you can call him at 253-383-1200, or click here for more information. If you have any other questions, give us a call or send us an email. We look forward to hearing from you!
