Can You Benefit From a 1031 Exchange?

When it comes to investment properties, did you know that quickly reinvesting in a comparable property can lead to tax savings? It’s known as a 1031 exchange, and it’s a pretty straightforward process, as long as you can meet certain criteria and deadlines.

Our team at First National Title has hundreds of combined years of experience closing 1031 transactions, and we’re ready to assist if this type of transaction is right for you. Here are the basic rules:

Time limits must be met and properly documented – Generally, you’ll have 45 days to identify potential replacement properties, beginning on the date that your property is sold. The exchange will officially begin on the date the deed is recorded, or the date possession is transferred to the buyer, whichever is earlier. Typically, you’re required to complete the transaction in 180 days after it begins, or the date that your tax return is due (including extensions), for the taxable year in which the relinquished property is transferred, whichever is earlier.

The properties must serve a similar purpose – Both properties must be located in one of the 50 U.S. states (or the U.S. Virgin Islands), and must be “like-kind,” meaning that they’re similar in nature, character, and class. It doesn’t necessarily matter if the properties are developed or not, but you won’t be able to exchange a commercial property for a residence; 1031 exchanges are typically limited to investment properties, and primary residences don’t usually qualify.

All proceeds from the sale must be applied to the purchase of the replacement property – With a 1031 exchange, the replacement property needs to be of equal or greater value. You’re allowed to invest additional funds toward the purchase price of the replacement property, buttypically one can’t avail themselves of the full benefit of a 1031 exchange when a less expensive property is purchased as a replacement property, and when the difference in the price of the replacement property is pocketed.

If you’re looking to make an upgrade to a new investment property, a 1031 exchange is a great way to save money on your taxes, and our team at First National is ready to assist you with this type of transaction. Contact us online, or visit any of our 13 convenient Arkansas locations for all of your real estate closing and/or title insurance needs!