The hot US housing market is also making the rental market busy too. In fact, there are some 44 million rental-occupied properties in the US right now. While not long ago, many investors opted to put their money in the stock market, only about 50 percent of investors now use that avenue for investing.
Now, many millennials are choosing instead to invest in real estate. While real estate isn't a liquid asset, it provides a great opportunity to grow your money over time. Many investors are taking advantage of 1031 exchanges as they grow their real estate portfolio.
So how do 1031 exchanges, or like-kind real estate exchanges, work? What advantages do they bring to those interested in real estate investing? Read on to learn more.
What is a 1031 Exchange?
The goal of real estate investing is to grow your money, right? You can turn a profit in a few ways with real estate investing. Of course, if you have an investment property, you can make income from renters. You also actually make money when you sell the property.
Unfortunately, that's also when you're expected to pay capital gains taxes. What many real estate asset management investors do instead is take advantage of 1031 exchanges which allow them to put off paying those capital gains taxes.
1031 exchanges allow you to sell one property and to avoid paying the taxes, you instead invest in a new property, which is why this is often called a like-kind exchange. Investors know they want to avoid paying those capital gains taxes when they are at their peak tax rate. If they can wait to pay them when they're in retirement and their income is lower, they will pay much less.
Real Estate Investing and 1031 Exchanges
So, how can a 1031 exchange work with an investment property? The rules for 1031 exchanges were actually made for commercial and investment property. You can't take advantage of a 1031 exchange for your personal property, it can only be used for investment real estate.
The 1031 exchange allows you to sell a commercial or residential investment property. Then take the money and invest it into a "like-kind" type of property. So, you wouldn't get the tax advantage by selling your investment property and using the money towards a bigger home for yourself. You would need to reinvest in another type of investment property.
Rules of a 1031 Exchange
If you're interested in taking advantage of a 1031 exchange in the Pittsburgh real estate market, you want to do your homework and learn the rules connected to a 1031 exchange. They are pretty strict and have some tight time frames associated with them. Not following them could cost you a hefty amount in tax liabilities.
Some of the 1031 exchange timelines include:
- Funds from a sold property must go to a qualified intermediary (QI) to be held
- Within 45 days the investor must identify three new potential properties for reinvestment
- Must close on one of the three identified properties within 180 days of closing on the previous property
There are many other qualifying standards for 1031 exchange. It's important to understand investment property value and how depreciation factors into value when considering a 1031 exchange.
Take Advantage of Pittsburgh 1031 Exchanges
1031 exchanges are a great avenue to avoid paying unnecessary capital gains taxes. However, you do need to work with a real estate agent and consultant who completely understands the rules of a like-kind exchange to make sure you avoid any costly errors.
If you have investment properties and you might want to consider a property management team to help you. Learn more about our property management services by visiting our website.
