Can a 1031 Exchange Make Sense with Rental Property?

As a real estate investor, it’s likely that you’re already familiar with the many favorable tax-related benefits that owning rental property can have. Depreciation, expenses, and even the mortgage interest can offer some nice deduction opportunities each year at tax time. But what happens when you’re in the market to sell your current rental units and move on to other residential income-producing opportunities? One tax-advantaged strategy could be to use a 1031 exchange.

The term “1031 Exchange” is defined under section 1031 of the Internal Revenue Code. This strategy allows an investor to defer paying capital gains taxes on an investment property when it is sold – provided that another property of like-kind is purchased with the profit from the initial property.

There are several rules that need to be followed, though, in order for the transaction to qualify as a 1031 exchange. First, the property that you are purchasing must be worth at least as much as the one you are selling.

In addition, any of the cash that you receive from the sale of the old property must be used for purchasing the new one. A third-party intermediary must also hold the cash from the sale until it is used for purchasing the new property.

Provided that you stay within the IRS guidelines and in turn, defer the tax on the property you’re selling, a 1031 exchange could make a lot of financial sense. On the other hand, securing a more expensive – and possibly larger – investment property could require more of your time for maintenance and management tasks going forward.

If you’re already spending too much of your own time managing tenants and maintaining your investment properties, it may be time to consider hiring a property manager. A good property management team will work with you on a long list of items, including marketing vacancies, screening tenants, and even responding to emergencies in the middle of the night!

So, if you own rental real estate in Orlando and / or the surrounding Central Florida area, and you’d like more details on how you can take back control of your time, Contact Us today and let’s talk!