Homes for Rent and the 1031 Exchange: How They Work Together

Homes for Rent and the 1031 Exchange: How They Work Together

Did you know that rental prices in Florida have increased over 30 percent since 2011? There are 65 percent more renters in the state despite the price increase. This is why now is a great time to buy an investment property. 

But owning homes for rent also requires a sound investment tax strategy. Have you heard of the 1031 exchange? It could be very beneficial to you if you're considering a real estate investment.

The following guide will explain how the 1031 exchange works in tandem with homes for rent. Read on to learn about this tax strategy and how it helps real estate investors.

What Is a 1031 Exchange?

A 1031 exchange involves trading one investment property for another. Most property trades are taxable as sales unless it meets the requirements of 1031. You'll either have no tax to pay or reduced tax if you meet the requirements.

The exchange gets its name from Chapter 1031 of the Internal Revenue Code. 1031 typically involves the selling of rental, vacation, or investment properties.

1031 Benefits in Florida

In Florida, a 1031 exchange allows you to defer the capital gain taxes on a rental leasing property you're selling. However, you must reinvest all of the profits into a different investment property.

A 1031 exchange helps to build wealth rapidly by making your money work for you instead of it going to taxes.

Property Requirements

The property for sale must have been used for business or as an investment to qualify for 1031. The replacement property must meet the same criteria or the IRS may deny your exchange.

Any amount of land for sale qualifies as an investment property. Commercial buildings also always qualify for the exchange. Rental properties produce income and so they meet requirements and qualify for business purposes.

The IRS usually views flipping homes as inventory rather than an investment. Sometimes holding a fixer-upper for more than a year and renting it at market value helps it meet 1031 requirements.

Properties exchanged must be like-kind. So, you can't replace investment or business use properties with personal properties. For example, it's ok to sell land and buy a rental property, but not a personal home.

Qualified Intermediaries

You're not allowed to hold proceeds from the sale of your relinquished property to successfully defer taxes. You must go through a qualified intermediary and they'll handle the transfer of funds.

Working with a qualified intermediary is crucial to your 1031 exchange because it's required by the IRS. Not going through this process will disqualify you from any tax benefits.

The QI also drafts all necessary 1031 documents for you. They ensure that paperwork is completed and all deadlines are met.

Homes For Rent and 1031 Work Together

Now you know how the 1031 exchange works and how it benefits rental property owners. Remember this guide if you have homes for rent and are looking to sell and reinvest in the future.

Please contact us today if you're in the Fort Lauderdale, Florida area and need more information about the 1031 exchange. We'd love to help you develop an effective tax strategy!

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