Long thought of as the retirement capital of the United States, Florida is reinventing itself as the new national destination for real estate investment. According to a February 2018 Forbes article, “Best Buy Cities: Where to Invest in Housing in 2018” by Samantha Sharf, Orlando is ranked first in the country for value in real estate investment. Sharf and the team at Forbes highlight Orlando’s 7.1% job growth over the last two years as well as the 7.6% population growth over the past three years as strong factors in addition to their Local Market Monitor’s speculation that the prices of homes in Orlando could increase another 35% by 2021. With Orlando’s average home value still sitting roughly 22% below the national average, the opportunity for first-time and long-time investors to build or expand their portfolio has never been better.
Though Florida has no state capital gains tax, making it an even more desirable investment location, investorsin the state should take advantage of every opportunity afforded by the IRS tax code. Orlando is a perfect market for the educated investor to consider a 1031 exchange.
A 1031 exchange is defined in Internal Revenue Code Section 1.1031, which states: “No gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment.” This tax deferral statute allows the federal taxpayer to defer the payment of federal and state capital gains as well as recaptured depreciation when selling and replacing property held in a trade, business or for investment. Those otherwise paid tax dollars can be used towards acquiring a replacement property interest free. There is no limit to the number of 1031 exchanges a taxpayer can initiate.
A few of the key considerations for a 1031 exchange are as follows:
Like Kind
An investor must replace “real property” with other “real property” to be considered like kind. For example, rather than thinking of the type of property as, say, a single-family home that needs to be exchanged for a single-family home, think of it more as a property that is used for investment exchanged with a property used for investment. This could mean that you could relinquish a beach condo you own and replace it with a warehouse that you will rent out to a commercial tenant. As long as your fact pattern is that of investment and the property is not your personal residence or a second home, it will be eligible for consideration for exchange.
Time Frame
There are two very important and firm time frames that dictate the successful completion of a 1031 exchange. First is the “Identification Period”: once the exchange begins by closing on your relinquished property, you have 45 calendar days to identify in writing to the qualified intermediary replacement property candidates that you will be pursuing to purchase. The second important date is the close of the “Exchange Period”, which is defined as 180 calendar days from the closing of the first property in the exchange.
Value
When engaging in a 1031 exchange, to fully defer the capital gains and depreciation recapture, the net purchase price of the replacement property must be equal to or greater than the net selling price of the relinquished or old property to maximize the deferral. There is a common misconception that only the amount of capital gains accrued from the sale of the relinquished property needs to be deferred but, in actuality, in order to satisfy the IRS code, we look to the net selling price. Partial exchanges are acceptable but be sure to secure the input of your CPA as to the tax consequences. Retired debt and net equity from the relinquished sale must be replaced in the new property otherwise you may trigger mortgage or equity boot, which is a tax on that portion of debt not replaced or cash received. Cash offsets debt but debt does not offset cash.
Qualified Intermediary
In order to satisfy the IRS requirement that the individual initiating the 1031 exchange does not violate the g(6) constructive receipt regulations in the 1031 code or has access to the proceeds of the sale, a Qualified Intermediary (QI) is required. This entity or company will hold the proceeds in escrow during the exchange period under your tax identification number in a non-commingled account as well as be a resource before, during and after the exchange to explain the IRS tax code requirements. Selecting an experienced and trustworthy QI is a key component of a successful exchange process.
A 1031 exchange has the potential to be a versatile and compelling tool for any real estate investor who is seeking to build a portfolio maximizing IRS recognized tax advantages. With the increasingly lucrative Orlando real estate market on the rise, investing in Central Florida is worthy of your consideration and a 1031 exchange has the potential to increase the value of that investment.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
