As a Seattle real estate investor, your profits directly depend on your ability to learn the ins and outs of the industry and capitalize on key tax advantages like a 1031 Exchange. If you are unfamiliar, a 1031 Exchange, often referred to as Starker Exchange or Like-Kind Exchange, is a process that allows you to defer your tax payments. In other words, it is a strategy used by the savviest investors in which they may choose to exchange a property in a more expensive markets for a property offering more cash flow or upside. As your Seattle real estate investing expert, I am going to break down the various types of 1031 Exchanges and the critical rules that dictate how and when to use them.
4 Types Of 1031 Exchanges
Simultaneous Exchange: When you close on the property that you are selling and the one you are exchanging it for, it is known as a simultaneous exchange. This can be done by directly swapping properties with another owner, or by having a third party accommodate the exchange.
Delayed Exchange: In the most popular type, known as a delayed-like exchange, you will relinquish your original property before you purchase your next one. Despite its popularity, this type of exchange can be challenging or stressful, due to a restrictive time deadline.
Reverse Exchange: Sometimes referred to as a forward exchange, a reverse exchange describes the occasion of buying your replacement property via an exchange accommodation titleholder prior to selling your existing property. In other words, you buy now and pay later.
Construction Exchange: When you find a replacement property that needs some repairs, a construction exchange may be your best option, because it allows you to use the exchange equity. While an intermediary holds your property, you can use your tax-deferred funds to make improvements over a 180-day period.
#1 Rule Of A 1031 Exchange
1031 exchanges offer you significant tax benefits, however there are several critical rules that you must follow in order to qualify. Chief among them is that the property you are selling and the one you replace it with must be “like-kind”. This means that they must be similar in character, nature, and quality. In other words, you can’t exchange a tractor for a triplex. However, exchanging a duplex for an apartment building would be permitted.
Need A Seattle 1031 Exchange Expert On Your Side?
I enjoy being a problem solver for my clients needing the benefits of using 1031 exchange of properties to defer capital gains taxes. Often, you will have a restrictive time window to sell your Seattle investment property and then identify and purchase another qualifying property that satisfies the 1031 rules. Not all agents are experienced in working with 1031 administrators or understand the requirements of this type of transaction, which makes it nearly impossible for them to offer the informed efficient guidance you will need. I have assisted countless investor clients for many years in taking advantage of the tax benefits of 1031 exchanges.