A 1031 exchange allows the taxpayer to defer indefinitely federal and state capital gain and recaptured depreciation taxes that may represent a tax of up to 40 percent of the net sales price. The Internal Revenue Service (IRS) Section of the tax code is used by taxpayers who own residential properties that are held in the productive use of a business or for investment. When the property is sold and conveyed at closing or escrow, the capital gain tax obligation is triggered that can be deferred or pushed forward if a 1031 exchange is initiated prior to or at closing.
A replacement property of equal or greater value must be acquired within 180 calendar days; otherwise, the partial or full tax is due. The 1031 tax code also applies to property held internationally when replaced with property held overseas. Many investors who are looking to defer taxes on the sale of their residential investment property find that a 1031 exchange can be a powerful tool.
Single and Multi Family 1031 Exchange Properties
One of the more common property types utilized in a 1031 exchange is the single family home. As a staple for most investors, we often advise Exchangors on how to utilize their rental property as part of their tax deferral strategy. Though it is common, there are other residential properties that can be utilized, such as:
- Apartment Complexes
- Duplexes
- Quadplexes
- Condominiums
- Townhomes
- Mobile Homes (as long as they are affixed to the ground)
Keep in mind that I.R.C § 1031 allows for the Exchangor to sell one property type and acquire another. It is a common misconception that “like kind” refers to the property type and not the intended use for trade, business or investment purposes. You would be able to sell a townhome and purchase a duplex, or even sell a condominium and purchase a commercial property. Being aware of all of the property types available will broaden your investment opportunities and allow for a more diversified strategy.
If you are considering a 1031 exchange for your residential property, Atlas 1031 provides the accommodation services compliant with Internal Revenue Code Section 1031. Click below to begin a consultation or call our office at 1 800 227 1031.
