Does a 1031 Exchange Make Sense for Rental Property?

If you’ve been looking for a way to upgrade your real estate investment portfolio but at the same time reduce – or even eliminate – the taxes that would be due on the sale of your current holdings, a 1031 exchange could be a viable strategy for you.

A 1031 exchange entails swapping out one investment property for another, which in turn, allows the capital gains taxes to be deferred until a time in the future. In some ways, a 1031 property exchange is similar to the tax-advantaged growth that investors receive on their traditional IRA funds, because without current taxation, the value of the property can continue to grow and compound.

In order to take advantage of the tax benefits that a 1031 exchange can provide, it is important to follow all of the rules. For instance, only “like kind” properties may be exchanged. The IRS defines like-kind exchanges as “swapping real property that is used for business or held as an investment solely for other business or investment property that is the same type or like-kind.”

Properties are considered like-kind if they are of the same nature or character – even if they are different in quality or grade. As an example, exchanging an apartment building for another apartment building would be considered by the IRS as a like-kind exchange.

In addition, a 1031 exchange must be completed within a certain time period. For example, the exchange begins on the date that the deed is recorded or on the date that possession of the property is transferred to the buyer – whichever of these occurs first.

The exchange ends either 180 days after it begins, or on the date that the exchanger’s tax return is due for the taxable year in which the property has been transferred – whichever of these dates is the earliest.

Once a 1031 real estate exchange has been completed, it will still be necessary to manage and maintain the property, as well as collect rent from the tenants. If you would rather delegate these tasks so you can focus on other matters, though, it could make sense to work with a property manager.

So, if you own rental real estate in Orlando and/or in the surrounding Central Florida area, give us a call and we will be happy to provide you with more details on how our property management services work.