2024 San Diego 1031 Exchange Guide
If you’re looking to defer federal capital gains taxes in the area of real estate, then you might want to look into the realm of exchange under the Internal Revenue Code’s Section 1031. In the state of California, the San Diego 1031 Exchange may be suitable for you. Keep reading to learn more about what the San Diego 1031 Exchange is, the myths and rules surrounding it, and how it may benefit you.
Selling Your Investment Property in San Diego
If you are interested in selling your investment property in San Diego, you can choose a tax-deferred exchange under Section 1031.Â
This part of the tax code allows you to sell investment properties and buy similar types of properties while, at the same time, postponing federal and potentially state capital gains taxes.
However, you will need to have an independent and qualified intermediary to hold onto your funds between selling your initial investment property and buying your secondary replacement property.Â
These funds can be held for the productive purchase of new real estate property. You can choose a qualified banker to be your independent intermediary. You may also need an exchange accommodator to help structure the exchange.
Below, we define the San Diego 1031 Exchange in more detail.
What Is a 1031 Exchange?
Essentially, a San Diego 1031 exchange is a way to replace one real estate investment property for another while postponing your capital gains taxes. However, you will need to follow particular IRS rules in terms of the timeline and deadline to complete this type of transaction.
You will be able to defer the tax on the gain of the original relinquished property you sell. While your funds remain with an intermediary, you can pursue purchasing replacement property.
The tax-deferred exchange under 1031 allows you to continue investing in real estate and gain more experience as an investor. You can continue buying real estate without needing to pay money to the government each time you buy a new property.Â
However, be aware that this is only a way of postponing the payment. Eventually, you’ll need to pay off all federal and state capital gains taxes. This occurs when you are ready to stop being a real estate investor and want to cash out. At this point, a former real estate investor pays taxes in full.Â
Benefits of the San Diego 1031 Exchange
There are various benefits of pursuing the 1031 tax-deferred exchange in the city of San Diego. Some key advantages include:Â
- Simplifying the process of real estate investing
- Reducing the overall cost for real estate investorsÂ
- Improved purchasing power
- Allowing consolidation and diversification of a real estate portfolio
- Increased depreciation
- Providing real estate maintenance relief
- Boosting income and cash flow
Furthermore, 1031 exchanges make a significant difference in terms of how much of a down payment an investor can produce. It will also allow the investor to purchase more expensive business or investment properties.
You can also increase cash flow if you sell an empty lot and replace it with a building that generates income, such as through a small grocery store. Any trade or business taking place in a new property you buy will help you generate more cash flow.
Clearly, there are significant advantages that investors can obtain through the 1031 exchanges in San Diego.
1031 Exchange Myths
1031 exchanges have been a part of the US tax code for 100 years. However, continual myths are surrounding these tax-deferred exchanges.Â
Two of the most common myths include that 1031 exchanges are only for the wealthy and that a 1031 exchange must occur simultaneously. We go into more detail about these two myths below.
Myth: 1031 exchanges are only for the wealthy
While it may seem that these types of real estate transactions only occur among high-profile investment companies, similar types of kind exchanges occur among simple, everyday people as well.Â
It is not always about selling off large office buildings or properties to defer capital gains taxes. There are also small business owners and property owners who can defer taxes by selling their property to buy land or another building.
For instance, a landlord who sells a three-decker rental property and purchases a replacement property can also take part in deferring capital gains taxes through a 1031 kind exchange. It is false to assume that only the wealthy can operate through the 1031 exchanges.
There are plenty of middle-class investors and small business owners who take advantage of these real estate investment opportunities through the 1031 exchanges. For legal advice regarding a real estate investment opportunity, you’ll need to contact a real estate attorney.
Myth: A 1031 exchange must be simultaneous
The 1031 exchange was initially made to be simultaneous when it was established in 1921. However, things have changed over the last century. Today, the simultaneous exchange alterations allow more chances to complete a real estate exchange opportunity.
Currently, a widespread exchange is the forward exchange, which requires one asset to be replaced with another similar real estate property within 180 days. There are also specific deadlines to follow in a 1031 exchange.
The 180-day limit allows for a 1031 exchange not to be simultaneous. There are also reverse exchanges where you can purchase the replacement property 180 days before selling the initial investment.
This myth is also completely false, as multiple types of exchanges do not need to be completed simultaneously
1031 Exchange Rules
There are specific rules to follow on the 1031 exchange, which include:
- Qualified use – All properties that are either replaced or relinquished need to be held for investment or income production from a trade or business.
- Holding period – While there is no specific amount of time required to develop a use for a real estate investment, the property cannot be resold or used in a personal way.
- Like-kind – The replacement property needs to be similar to the property meant for sale (house for a house, land for land, etc.).
- Equal value – To defer the capital gains tax, you’ll need to purchase a replacement property that is either equal or greater in value to the sold property. Furthermore, all funds from the sold relinquished property must be put toward the purchase of the replacement property.
- Purchase period – You need to identify the replacement property in 45 days or less. Purchase of the replacement property needs to occur within 180 days after selling the relinquished property.
- Identification – There are three ways to identify a replacement property. First, you can pick three properties regardless of cost. Second, you can select any number of properties as long as their combined market value is not greater than 200 percent of the relinquished property. Lastly, you can choose any number of real estate properties if you purchase 95 percent of the total cost of the identified properties.
- Qualified intermediary – You will also need a qualified intermediary who will hold the funds for the sale of the relinquished property before you buy a replacement real estate investment property.
1031 Exchange Rules
There are specific rules to follow on the 1031 exchange, which include:
- Qualified use – All properties that are either replaced or relinquished need to be held for investment or income production from a trade or business.
- Holding period – While there is no specific amount of time required to develop a use for a real estate investment, the property cannot be resold or used in a personal way.
- Like-kind – The replacement property needs to be similar to the property meant for sale (house for a house, land for land, etc.).
- Equal value – To defer the capital gains tax, you’ll need to purchase a replacement property that is either equal or greater in value to the sold property. Furthermore, all funds from the sold relinquished property must be put toward the purchase of the replacement property.
- Purchase period – You need to identify the replacement property in 45 days or less. Purchase of the replacement property needs to occur within 180 days after selling the relinquished property.
- Identification – There are three ways to identify a replacement property. First, you can pick three properties regardless of cost. Second, you can select any number of properties as long as their combined market value is not greater than 200 percent of the relinquished property. Lastly, you can choose any number of real estate properties if you purchase 95 percent of the total cost of the identified properties.
- Qualified intermediary – You will also need a qualified intermediary who will hold the funds for the sale of the relinquished property before you buy a replacement real estate investment property.
Unique Rules for 1031 Exchange in San Diego
In San Diego, California, you will need to follow state rules for the 1031 exchange. There are some additional rules in California for this type of tax-deferred exchange.
For instance, it is possible to purchase replacement property in another state, but there are certain specifications if you do so.
The California Clawback Law requires any capital gains obtained from a California real estate purchase to face the California state tax after the sale of the real estate investment, even when the purchaser used a 1031 exchange to buy a property across state borders.
California 1031 exchange rules include the following:
- Qualified intermediaries need to have a bond of $1 million or more
- Your exchange process must maintain an errors and omissions policy
- Specific deadlines to meet for identifying and purchasing a replacement property
- Filing and reporting a like-kind exchange through the FTB 3840 form is required in California
If you choose to partake in a 1031 exchange in San Diego, be sure to follow the laws in California.
Straightforward Process
Essentially, there are three simple steps that you need to follow to complete a 1031 exchange of your real estate investments. First, you need to sell the relinquished property. At closing, all of your proceeds from the sale need to go straight to an independent and qualified intermediary.
The next step is to identify a replacement property 45 days after selling your relinquished real estate property.
The last step is to buy replacement property within 180 days after selling your original real estate investment. All funds from your intermediary will go straight toward this purchase.
Contact the Leading 1031 Exchange Company in San Diego!
Now that you know all about moving forward with a 1031 exchange in San Diego, you will need to contact the local leading 1031 exchange company. Call us today at 626-551-4326 to find out how a real estate professional can help!
