Investment Property Guide: What is a 1031 Exchange?

Investment Property Guide: What is a 1031 Exchange?

The Birthplace of County Music continues its real estate boom. And the average Nashville investment property lists at over $450k. With major companies like Vanderbilt University Health Care and Nisson North America, real estate investors have ample chances for steady cash flow.   

But capital gains tax comes with the territory with real estate investing profits. However, a 1031 exchange can defer hefty capital gains taxes on your tax statements and 1099s. So, my real estate investor friends, read why a 1031 exchange is essential for real estate investing.  

Are you looking to swap your real estate assets to get into the Nashville market? No problem. Learn how the 1031 exchange is invaluable to your real estate portfolio. 

The Value of a 1031 Exchange for Investment Property 

When you sell intangible assets like stocks and bonds for a profit, the capital gains tax incurs. And real estate investing profit is no exception. 

Tennessee doesn't impose a capital gains tax. Yet, this is not the case on the federal level. But a 1031 exchange permits real estate investors to substitute one real estate asset for another while deferring federal capital gains tax. 

Real estate investors can defer the capital gains taxes for years via the 1031 exchange. The term 1031 exchange comes from IRS Section 301

How the 1031 Exchange Works in Real Estate

Real estate investors can't conduct a 1031 exchange on a personal level. Instead, a qualified intermediary works between real estate investors to swap investment property. The qualified intermediary handles the escrow account that holds the monies from the sale. 

However, the IRS requires your investment property to be like-value with the desired real estate asset. Home River Group can help with a rental analysis to determine your future investment property's ROI. 

For example, real estate investors can exchange a rental investment property for a vacant lot similar in value. As a result, a successful investment property swap can appreciate while delaying the tax burden.

1031 Exchange and Depreciation

Real estate depreciation allows real estate investors to deduct the value of an investment property over time. But, real estate advisors should be careful not to undersell real estate assets. 

Otherwise, the depreciation might factor into tax statements and 1099s. Known as depreciation recapture, the IRS sees this undersell as ordinary income. Real estate investors can rely on our team to find a comparable investment property.

45-Day Rule for Investment Property  

After a successful investment property swap, the qualified intermediary receives the proceeds. Also, real estate investors must submit three viable real estate assets for substitution in writing. Keep in mind that there are no 1031 exchange extensions during this process.   

After 180 Days

Real estate investors must formally close on the 1031 exchange. It is possible, under certain circumstances, to buy a new investment property before selling the old one. To preserve the 1031 exchange sanctity, you must apply 45-day and 180-day rules.

More about how to Swap an Investment Property 

Home River Group takes away the stress of property management while preserving your bottom line. Don't know where to find the tenants for your investment property? No worries. 

Home River Group's sophisticated tenant screening helps you find reliable paying tenants. And if the situation warrants, we assist real estate investors in evicting unfavorable tenants. 

The time to invest in Music City investment property is now. Contact Home River Group today to get started with your 1031 exchange.

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