Clients in California often reach out to Richard Real Estate about buying homes in Arizona with a 1031 exchange. In fact, many investment owners are selling their rental home in California and buying two investment properties here in Buckeye, Arizona. While the process can be daunting and restrictive, we wanted to review a few of the basics for clients interested in taking advantage of a 1031 exchange to purchase property in Arizona.
First of all, let's understand what is a 1031 Exchange? A 1031 exchange allows you to minimize and even defer tax liabilities on the profit you make from the sale of an investment property. Those profits are also known as capital gains. Anyone who's a real-estate investor knows they want to keep as much of their profits as possible.
The term 1031 exchange gets its name from the actual IRS code that refers to this deferment; section 1031. If you currently own an investment property and are considering selling it, you need to know a few basics to take advantage of a 1031 exchange.
1031 Exchange Basics in Arizona
What Type of Transactions Qualify for a 1031 Exchange:
To take advantage of a 1031 Exchange in Arizona, you have to buy property or properties that are "like-kind" exchanges. For example, if you're selling an investment property in California, you have to buy an investment property or properties in Arizona. In other words you're basically swapping your properties in one state for another "like-kind" property.
The IRS gives some flexibility to what they consider "like-kind". For example, you can sell a duplex and buy a small apartment building. However, the property must be used for business or investment purposes.
If you're a home-flipper, chances are, you won't be able to take advantage of a 1031 exchange. That's because the IRS code specifies that properties held for sale do not qualify for a deferment of taxes. But, if the property has a business or investment purpose, such as collecting rent or is defined as a warehouse, you can take advantage of a 1031 exchange.
Remember, a 1031 exchange allows you to roll your proceeds from a sale into a new investment property. Clients seeking to take advantage of this exchange should contact Patricia Paral
with Richard Real Estate Sales
ARE CAPITAL GAINS TAXES DEFERRED INDEFINITELY?
Many investors think that by taking advantage of a 1031 exchange, they never have to pay capital gains taxes. It's important to understand that the taxes are temporarily deferred for as long as you keep the replacement property. Once you sell the new investment property you will have to pay capital gains taxes.
That said though, it makes sense for a lot of investors to benefit from the deferment and continue to receive income for the property.
WHAT ARE THE TIMELINES?
So, here's the tricky part...timing. It's the exact reason, it's imperative to work with a knowledgeable real estate agent in Arizona, like Patricia Paral
, who understands the market and region.
To receive the full benefit of a 1031 exchange in Arizona, you must find a replacement property for the assets sold within 45 calendar days and complete the exchange within 180 days. Furthermore, the replacement property or properties need to be of equal or greater value with notice provided in writing to the IRS of your intent.
WORK WITH A QUALIFIED INTERMEDIARY?
Under section 1031, the proceeds received from the sale of a property remain taxable. This is why those proceeds must be transferred to a qualified intermediary, rather than the seller of the property. Once the transaction is approved, the qualified intermediary, moves the funds to the seller of the replacement property or properties.
A qualified intermediary is a person or company that agrees to transfer the 1031 exchange by holding the funds for the transaction until they can be transferred to the seller of the replacement property. The qualified intermediary must have no other formal relationship with the sellers.
If you’re looking to buy property in the Buckeye real estate market and take advantage of a 1031 exchange, connect with Richard Real Estate, LLC at 623-386-8762.
We're ready to assist you and will always have your best interest at heart. Click here to view current homes on the market