A 1031 exchange provides taxpayers the opportunity to defer taxes when they sell an investment or business-use property for another business or investment-use property of equal or greater value. These taxes can include capital gains tax, depreciation recapture tax, state taxes, and NIIT tax. Understanding the property type rule of a 1031 exchange is critical to creating a tax shelter. People often think that if they sell a condo or vacant land, they must purchase that same property type to do a 1031 exchange, but this is not the case. If the property you sold had a deed, the property you purchase has a deed, and the property is for investment or business-use only, then it qualifies for an exchange. Some examples of what a real estate investor could exchange include commercial property, rental properties, raw land, and more!
Commercial Properties or Triple Net Leases:
An investor could sell an existing residential rental building and roll the proceeds into a Triple Net Lease (NNN) like a commercial property. The investor, as the landlord, collects the net rental income after the monthly mortgage payment. The advantage of this type of investment is that the tenant pays all operating expenses, property taxes, utilities, insurance premiums, repairs, and maintenance. This type of investment is an attractive option for the investor looking to move away from the management-intensive properties and invest in something that requires less energy.
An investor could sell vacant land and purchase residential property, such as a house or a condo. With this type of property, an investor can rent the property to provide supplemental income, since you are not allowed to live in it as a primary residence. While the IRS doesn’t have set rules as to how long you should hold a property you plan to exchange, two years has been considered a sufficient amount of time to have shown investment intent. With some planning, you could convert your rental property into your primary residence after those two years and keep the property tax sheltered by the exchange.
An investor could sell their existing shopping center in exchange for an apartment building. Multi-family properties can be excellent investments, especially in times of low-interest rates.
Owner Occupied Business Property
This property type is one of the most common in 1031 exchanges. Business owners can expand company headquarters or factories by purchasing a large building to suit their needs.
These investments are private units owned by individuals and rented to guests. Many investors find this option appealing because they can avoid all the traditional vacation home maintenance costs while still offering all the amenities that come with the hotel.
Many investors purchase underdeveloped land in the hopes of eventually building on it, whether for personal or business-use. Some hold the property for 10 to 20 years as a retirement project, while others develop the land sooner with a business or strip mall. The opportunities are endless when you purchase vacant land. The key to remember is that it is all in the planning and intent for the property.
Oil and Gas
Many people are unaware that there are numerous oil and gas projects recognized as “like-kind” to all other 1031 exchange properties. Why? Real estate ownership can include mineral rights at fractional interests of a long-term lease. This type of investment has several attractive qualities including potential returns, lack of maintenance, and an unwavering demand for these projects.
You can 1031 exchange any of the above real estate.
The only types of real estate that do not qualify for 1031 exchanges are:
- Primary residences
- Second homes with no rental history
- Second homes with minimal rental history
- Property with no intent for business or investment-use
By deferring taxes, you now have more money to acquire a larger property or even multiple properties.
To start exchanging or to learn more about 1031 exchanges, call Midland 1031 at 239-333-1031 or visit www.midland1031.com.