1031 Exchange Explained
1031 Exchange refers to the section of the Internal Revenue Code Section that provides for the tax deferred exchange of real and personal property.
Why Do a 1031 Exchange?
With a 1031 Exchange investors can trade up, consolidate, diversify, leverage or relocate their investments and not be penalized by having to pay either capital gains or recapture (the amount deducted while owning the property is taxable if the property is sold). The taxes are deferred until the investor does a non 1031 Exchange sale or the property goes to the investors estate.
Many investors find themselves requiring a 1031 like kind exchange replacement property and that’s why Orlando is one of the most popular options.
1031 Time frame Rules
There are two key timing rules you must observe in a delayed exchange.
- The first relates to the designation of a replacement property. Once the sale of your property occurs, the intermediary will receive the cash. You can’t receive the cash, or it will spoil the 1031 treatment. Also, within 45 days of the sale of your property, you must designate replacement property in writing to the intermediary, specifying the property you want to acquire.
The IRS says you can designate three properties so long as you eventually close on one of them. You can even designate more than three if they fall within certain valuation tests. - The second timing rule in a delayed exchange relates to closing. You must close on the new property within 180 days of the sale of the old.
Note that the two time periods run concurrently. That means you start counting when the sale of your property closes.
If you designate replacement property exactly 45 days later, you’ll have just 135 days left to close on the replacement property.
“Like-Kind” is Broad-Based
Most exchanges must merely be of “like-kind”—an enigmatic phrase that doesn’t mean what you think it means. You can exchange an apartment building for raw land, or a ranch for a strip mall. The rules are surprisingly liberal. You can even exchange one business for another.
Replacement Property Identification / Designation
The Three Property Rule
is the most common, allowing you to identify up to but no more than 3 options of any market value. You can purchase one,two or all three of these options. You can change your mind as many times as you like on these designated options as long as you are withing the 45 day period.
200% Rule
You can designate any amount of properties as long as total market vale of these properties does not exceed 200% of the net sale price of property you are selling.
The 95% Rule
Allows you to identify unlimited property options as long as you purchase 95% of the properties identified.
These options can be complicated, we strongly encourage you to discuss in detail with a Qualified intermediary (QI) to ensure the latest and most accurate information.
We can get you on track
Why Orlando is an ideal location to defer capital gains tax
Orlando is consistently #1 in real estate nationally
In 2019 Forbes “best bet” was Orlando and Real Wealth forecast Orlando as the #1 city to invest in 2020 and many others forecast it as #1 or #2.
It is regarded by Bigger Pockets as the #1 the “best rental markets to invest” 2022
Orlando is the #1 family vacation capital of the world.
Orlando offers a unique “turn-key” product to take advantage of the 75+ million visitors each year looking for accommodation.
Investors can leverage their cash into a short term rental property that can generate revenue on an annual basis while appreciating in value.
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Why Orlando?
Orlando is also in the center of the state of Florida with access to both the Atlantic and the Gulf of Mexico via a little over an hours drive. Easy access to the cruise port terminals of Tampa and Cape Canaveral makes it a great destination for cruisers.
Florida has no state tax which makes it extremely inviting to shrewd investors.
Lifestyle Investment.
Many investors enjoy the option to own a vacation home in central Florida, take full advantage of the millions of accommodation seeking visitors to the area parks and attractions each year and be also able to use the investment for friends and family when needed. Orlando is home to Disney World, Universal Studios, Lego-land and some of the finest entertainment in the world. It is also second in the USA in conversions visitors and it’s International airport gives easy access to The Bahama’s, The Caribbean and Mexico.
Orlando also offers some of the finest executive golf homes in world and Orlando is home to many of the top professional golfers and many sport and celebrities.
Central Florida Value
With home prices generally lower than most major US cities, and a vibrant tourist industry Orlando may be the number one option for investors looking to add additional diversification to their portfolio while reaping the benefits of a vacation home in Florida that can be used anytime for friends and family.
To learn more about the options of a 1031 exchange option in the Orlando area call us for a complimentary consultation.