What is a 1031 Exchange?
Introduction image by binyamin mellish A 1031 exchange is a powerful tool for real estate investors to help them defer the capital gains tax on the sale of one investment property and use those funds to acquire another. It sounds like a great tool for real estate investing, right? It can be, but it's important to understand all the moving parts before attempting to use one. If you're a real estate investor, or simply curious about a 1031 Exchange, keep reading to get all the info you need. What is Section 1031? The term 1031 Exchange gets its name from Section 1031 of the Internal Revenue Code. In the simplest terms, it's the swap of one investment property for another. This allows a real estate investor to change the investment without recognizing a capital gain, which would incur a sizable tax bill. And because there's no limit to how many exchanges you can perform, you can roll the gain over from one investment to the next without paying tax on the sale until you cash out years later. If used correctly, you'll only pay a single "long-term capital gains rate" which is currently 15% or 20%. And because it's based on income, some lower-income taxpayers may even pay 0%. To qualify, both properties must be located in the U.S., and most need to be "Like-Kind" exchanges. You can even apply the exchange to former principal residences under specific conditions. 1031 Exchange Timeline and Rules image by pixabay It's not common for an investor to find someone with the perfect property just waiting for you to come along for a swap. It's because of this that most exchanges are delayed which requires the use of a "Qualified Intermediary" - a middleman who holds the funds from the sale of your property and uses them to purchase a replacement property on your behalf. The 45-Day Rule requires that you designate the replacement property in writing to the intermediary within 45 days of when your property is sold. You may select up to three properties as long as you close on one. The 180-day Rule requires that you close on the replacement property within 180 days of your sale of yours. Both the 45 and 180-Day Rules run concurrently, so if it takes 30 days to designate the replacement property, you'll only have 150 days remaining for closing. Buying a replacement property before selling yours is called a "Reverse Exchange" which we'll go over in another article. 1031 Exchange Tax Implications Most of these tax-deferred exchanges won't be exact dollar-for-dollar matches. If you have available cash left over once your intermediary acquires the replacement property, they'll pay that out to you and the end of the 180-day period. The leftover cash known as "boot" is considered income and taxed as proceeds from the sale of your property in the form of capital gain, usually. It's also important to factor in mortgage loans or any debt on the property you're exchanging. The $1.25 million mortgage on the new property is lower than the $1.5 million mortgage on your old property - this leaves you with a $250k gain in the eyes of the IRS, and will be taxed as "boot". Can you do a 1031 Exchange on Vacation Homes? image by Jake Johnson In the past, it was possible to perform an exchange of one vacation home for another, then, later on, make it your principal residence and eventually sell it and shield up to $500k in capital gain if you'd live in the property for only two out of the past five. That loophole was closed by Congress in 2004, but you can still convert your vacation home into a rental property and perform an exchange. You're required to rent the home to another person for a specified time and limit your use of the home to 10% of the number of days during the specified time. An important distinction here is that you have to have tenants occupy the property. During this time, the vacation home can't be offered for rent without tenants or the property would be disqualified. Can you do a 1031 Exchange on a Principal Residence? image by pixabay Unless you rented your principal residence to someone else for a specified time period without living there, a principal residence won't usually qualify for an exchange. What about a 1031 Exchange on a second home? An important distinction to keep in mind is that 1031 Exchanges apply to property held for investment purposes. So a second home or vacation home, wouldn't qualify unless it's rented out for the required time while generating income. Here's an example of how a 1031 Exchange would work image by adolfo félix Let's say you own a small office park currently worth $1 million due to its location. Your real estate broker brings another listing to you for a larger office park in another part of town on the market for $1.25 million. While the new property isn't in a popular location, it contains more units in an up-and-coming area which means more rental income and the potential rental rates will increase over time. You use the 1031 Exchange to sell your smaller office park, and use the proceeds to help pay for the larger office park while deferring the tax liability. You're essentially left with additional funds (the deferred capital gains tax fee) to invest in improvements in your new office park and attract new higher-paying tenants. The Bottom Line A 1031 Exchange is a valuable tool real estate investors can use to defer capital gains taxes with unlimited frequency to assist in growing their real estate portfolio. However, the only way to do it successfully is by knowing the ins and outs of how to properly use the exchange or working with real estate agents who do, like The Family Real Estate Group. I hope you enjoyed reading this post and learning a little bit more about how 1031 Exchanges work. If you have any questions or comments, please leave them in the comments below or get in touch today! chris.sotiroglou@gmail.com 843-609-5202 | www.TheFamilyRealEstateGroup.com
Why is Selling Your Home So Stressful?
When people talk about the most stressful things they've ever done, selling a house comes up again and again. But why is the selling process so anxiety-inducing, and what can you do to make sure it doesn't happen to you? Let's look at some of the reasons selling a home causes you stress, and what you can do to remove the stress from those situations. photo by Pedro Figueras 1. It's a big financial decision photo by Pedro Figueras For most people, your home represents a large chunk of your net worth, and it's likely the biggest asset you own. so naturally, selling your home can be an emotional process that comes with the uncertainty of what the final sales price will be, will you make enough from the sale to help with the purchase of your next home, etc. How to ease the stress: The easiest way to ease the financial stress that comes with selling your home is to do your homework and hire an experienced Realtor® to help answer your questions. A Realtor® will have the most up-to-date information on the current market trends, homes for sale in your area, and the comparable homes that have sold in your area - and they'll help you feel comfortable that you've listed your home for the most competitive price. 2. You may not want to move, but you need to You may love your current home and neighborhood but other factors or major life events have made it necessary to move and sell your home. Accepting a new job or promotion which involves relocation, a divorce or separation, or moving to be closer to a sick family member are all common reasons for an unexpected move. Here's how the ease the stress: Stay focused on the new experiences you'll have and the new home you'll be making memories in after selling your current home. Research the new area and take note of events, interesting dining options, outdoors and shopping you want to try. Make plans to visit the area and get familiar with it to reduce the anxiety of a new place. 3. Paperwork, paperwork, and more paperwork Selling a home involves a lot of paperwork, from signing the listing agreement with your agent all the way to signing over the home to the buyers at closing. The amount you'll need to deal with can be overwhelming. Here's how to ease the stress: You'll see this as a recurring theme, but take the time to research and hire the best real estate agent in the area. Having a great agent with experience and one that gives you good vibes means you'll be comfortable asking questions and they'll be able to walk you through the entire process and ensure every document is signed and filed in a timely manner. 4. Getting your asking price Obviously, when parting with something you've developed a strong emotional connection to you're probably going to be pretty particular about the conditions needed to give it up. A home is no exception. So when you put your home up for sale, you're going to have an opinion of what your home is worth, your Realtor® will have another, and potential buyers another - all of which could vary widely. So, it's no surprise that getting the asking price for your home can be the source of stress for you. You may need a certain amount to finance your next home purchase or you may want to recoup expenses from a remodel. Whatever the reason, the chance you could get offered less than you're expecting or your Realtor® suggests is there. How to relieve the stress: This is another reason to work with an experienced Realtor®. Experienced agents will be able to expertly analyze the comparable homes that have sold in the area, have a feel for the current market conditions and advise you on the best selling price for your home that will get you top dollar and highest buyer interest. 5. Keeping the house clean photo by Cottonbro While the most recent real estate market has been so fast-paced it pretty much took just a single day of showings to get a quick sale, the typical process of selling a home involves at least several home showings. If those don't happen all at once, the effort it took to make your home spotless and staged just right gets harder and harder to maintain. And the more showings it takes, the more prospective buyers wander through the home, and the higher the stress level creeps to keep the house clean while you continue to live there and accommodate home showings. How to relieve the stress: One way to relieve this stress is to hire professional cleaners to clean the house on a regular basis. This way, you're only dealing with daily maintenance to keep things neat and tidy for any last minute showings. That same mindset works great for the exterior of your home as well. Hiring landscapers to get the home ready to list and then scheduled for weekly maintenance also means the only thing you'll need to deal with is keeping up with some leaf blowing or picking up fallen branches. 6. Displacement photo by Pedro Figueras The parade of potential buyers walking through your home (It's still your home after all!) and the need to tidy up and get out of the house for last minute showings can become pretty frustrating. Not to mention open houses, inspections and other necessary steps - it can become inconvenient and downright annoying after a while. Ways to relieve the stress: The easiest way to reduce the stress that comes from showings and open houses is to make sure that you and your family have a plan in place that allows you to get ready for scheduled and last-minute showings quickly. Keeping the house tidy and assigning tasks for quick cleaning touch-ups and having a specific storage area to quickly put things away will help. Placing your fragile and valuable items in storage or a safe will keep the security concerns to a minimum. And finally, have a few designated places to go when you need to get out of the house during showings that don't require reservations or special arrangements. The park, shopping mall, a movie or relative's house are all good choices. 7. Uncertainty photo by Pedro Figueras We talked about the uncertainty of getting the price you want for your home, but what about the "uncertainty" of the sales process in general? It's one thing if you have multiple showings, multiple offers and the home is under contract right away. This can cause its own stress by having to move up the schedule of everything. But what happens if the home doesn't sell right away? You may begin to wonder if you've missed something, if the home isn't priced correctly or if your agent isn't doing their job! Even though all the pieces seem to have come together, the right area, the right price, the right staging - anything can happen. How to relieve the stress: Stay busy! Keep the house clean, continue to pack, get quotes from movers, take things to storage. The perfect buyer will come along. As they say, "A watched pot never boils", so sitting around and waiting makes it seem like things are taking longer than they really are. Also consider making a list of questions for your Realtor® they can answer so you know what to expect and there are no surprises. Conclusion photo by Rodnae Productions In the end, it's important to remember you're not alone in the process of selling your home. Choosing a great real estate professional ensures you have a partner in the process who keeps you informed every step of the way and be your advisor when things get complex or stressful. It also helps to remember the potential buyers are probably stressing about the buying process, too! Otherwise, just stay organized, keep your emotions in check, practice self-care and keep your eye on the prize. Whether that's being able to move closer to family or loved ones, moving to a better neighborhood, buying your dream home or new adventures - get excited! chris.sotiroglou@gmail.com | 843-609-5202 | www.TheFamilyRealEstateGroup.com
Home for Sale Summerville, SC 1,400,000
Famous Hobbit House of Summerville, SC for Sale 430 Barfield Drive | Summerville, SC 29485 The hobbit house is finally here! Tucked away in one of Summerville's most exclusive communities, Walnut Farms. This storybook 16th-Century Elizabethan-Style home is awaiting its new owner! Bedrooms: 5 Bathrooms: 3.5 Square Footage: 5761 Area: 63 - Summerville / Ridgeville Subdivision: Walnut Farms More Details About 430 Barfield Drive, Summerville, SC This Summerville SC home for sale is listed by The Family Real Estate Group, the best real estate agents in Summerville, South Carolina. The Family Real Estate Group helps with home buying, home selling, home rentals, and vacant land sales throughout the state of South Carolina.
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