One of the important things to consider when investing in real estate is how you’ll pay for it.
If you’re looking for ways to trade one investment property for another without incurring capital gains taxes, a Reverse 1031 Exchange could be the answer. This allows you to sell one investment property and use the proceeds from that sale to purchase a new property without paying any capital gains taxes.
This article looks at what an opposite 1031 exchange is, how it works, and why it’s so beneficial.
This concept allows real estate investors to exchange one investment property for another while avoiding capital gains taxes on the difference. For example, a 1031 exchange occurs when a taxpayer sells an investment property and uses the proceeds to buy another property.
The plus points of this process are that it allows investors to diversify their portfolios by acquiring properties in areas that may improve over time or offer more growth potential than their previous holdings. It also gives the leverage to avoid paying capital gains taxes on selling their old properties.
How Does a Reverse 1031 Exchange Work?
The investor must select an exchange accommodation titleholder (EAT) who agrees to hold the title to the replacement property during the exchange process. Next, the investor and the EAT sign a Qualified Exchange Accommodation Agreement (QEAA), a written agreement describing the exchange parameters.
The investor must next purchase the investment property that will take the place of the relinquished property. The replacement property’s value must be equal to or greater than the value of the property it would relinquish. Finally, they can pay cash for the home or finance it with a loan from a mortgage company.
The EAT will take over legal ownership of the replacement property once you have made your QEAA and are closed on purchasing the replacement property.
The investor must designate which of their existing investment properties they intend to sell within 45 days of closing on the replacement property. The investor may sell up to three properties as long as they are equal to or less than the replacement property’s worth.
The investor selects a qualified intermediary and enters into a contract with them. The QI will have the authority to transfer the title to the new buyer of the relinquished property. They will also transfer the new property’s title from the EAT to the investor.
When the investor finds a buyer, they will enter into a contract to sell the property. Because they are the existing title holder for tax purposes, the investor should name their EAT as the property’s seller.
The investor sells their surrendered property within 180 days of obtaining the replacement property. The investor receives ownership of the new property from the EAT. If the process is completed within 180 days, they are eligible to tax deferral on the sales income of the relinquished property.
In the real estate industry, there are a number of different ways to buy and sell properties. A Reverse 1031 Exchange is extremely valuable to investors because they allow real estate investors to sell one property while utilizing the proceeds from the sale to acquire a new property. If you’re interested in learning more or ready to take action, begin maximizing your investment returns.