What a 1031 Exchange Means for Grand Rapids Real Estate Investors

Jul 30, 2021 | Owner Education, Property Management Education

Taking advantage of a 1031 exchange as a Grand Rapids real estate investor can offer you a number of financial benefits. Most investors enjoy this benefit because it allows the deferment of any capital gains taxes you might have to pay on a property you sell. But, the benefits don’t end there. With the 1031 exchange, you can reinvest the earnings from your sale into another investment property.

This is an excellent way to diversify and grow your investment portfolio.

Timelines can be tricky, especially in a market as competitive as the one we’re currently navigating. Here’s what you need to know when you’re conducting a 1031 exchange in Grand Rapids.

Using a 1031 Exchange to Your Advantage

To take advantage of a 1031 exchange and defer the taxes on the sale of one income-producing property, you will need to buy a new investment property – or several properties – that are similar to the one you’re selling.

Investors are sometimes put off by the requirement of a “similar” property, but similar does not mean exactly the same in this case. For example, an investor has the option to sell one single-family home and buy two condos. Or, maybe you’ll want to sell one apartment building and buy two single-family homes.

This provides shelter from high taxes when you earn a lot on the sale of an investment property. With values increasing, the rental property you sell today will likely be worth a lot more than it was when you bought it, and all that profit will be subject to capital gains taxes.

Unless you re-invest it through a 1031 exchange.

Steps to Working with a 1031 Exchange

Specific steps need to be taken when you want to defer your taxes with a 1031 exchange.

  1. Make sure your property qualifies for this tax benefit. This tax program is meant for investment homes. You cannot sell the home you’ve been living in and reinvest the money to buy a vacation home.
  2. You’ll need to exchange with a like property or properties. The new property you choose must have a value that is the same or higher than the original property. If you walk away from the exchange with any profit, they will be taxable.
  3. Find one property, two properties, or three to exchange with your current property.
  4. Use an intermediary and don’t take any of the cash from the sale of your property. The intermediary will hold your funds until they can be reinvested in your new purchase. Ask your property managers for a referral.

The intermediary is important and will hold the sale proceeds until you buy your new property.

1031 Exchange Timelines

Critical deadlines must be met.

The first deadline involves identifying a replacement property. You’ll need to do this within 45 days of selling your original property. This doesn’t mean you have to buy it – you simply must identify it. Then, you have 180 days to close on the new sale. The entire exchange must take place within the 180 days (meaning you don’t have 45 days plus 180 days – the clock does not reset).

The 1031 Exchange is one good way to keep all of the money you earn off the sale of an investment. However, this doesn’t erase your tax debt entirely. You are merely deferring the payment of your taxes. The current law allows you to do a 1031 Exchange as many times as you want. If you want to leave your investment property to your children or beneficiaries after you die, they’ll receive a step-up, which will let them avoid all the taxes you deferred.

1031 exchangeWe would be happy to talk more about the specifics of this process and how it might apply to you and your Grand Rapids investment properties. Please contact us at Short South Management and Development to learn more about this or anything pertaining to professional property management.