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Should You 1031 Your Rental Property?

Posted on August 4, 2015 by Ray Williams.

So here you are hearing about all the appreciation in the Denver Real Estate market. You have owned that rental property for some time now and have eyes on upgrading even possibly to a 2-4 unit. What can you do how can you save on the tax headache should you want to do this?

Are you aware that there is an IRS tax code that allows the sale of an investment property for a “like-kind” exchange? Meaning forward/prevent/shelter capital gains tax on the sale of the rental? You do have to buy another rental and there are requirements, but we have been helping clients just this month take advantage of this great opportunity to upgrade their rental portfolio.

What are the requirements, you say? Well, I am not a qualified intermediary but here are the basics. Frist, you have to use a qualified intermediary to facilitate the financial side. Meaning they will execute an agreement, and escrow the proceeds from sale A, while you contract to buy property B as your next rental (if you take cash, that money will be taxed). Second, you have a defined time to identify the next property(ies) (45 days) , and third, a defined time to close (6 months) on property B as well. If you don’t follow through on time, you will be required to take the income and tax hit for capital gains. Again, this is just to wet your whistle! Talk to a qualified intermediary or your CPA for more clarification. But I can say when I go to sell my rentals and modify my rental portfolio, I will use a 1031 exchange for sure. Should you want to learn more and get pre-approved to buy your next or even first rental let us know, or apply now.

Ray @MtgMaestro