Sellers were pulling their properties off the market in fear of losing their safe haven, and buyers were unsure if it was the time to put down money on a new home in fear of it not being the right time to invest. No one knew what a global pandemic would mean for the world, or for the economy. Such hesitancy about the market is understandable, yet the irony is that after closely examining housing market trends, we’ve quickly seen how incredibly impactful a pandemic truly can be to the market.
Some businesses have unfortunately plummeted, but this is not the case in the real estate market. Granted, in the spring, when most states were under a forced quarantine, and open houses were banned, not many homes were going under contract. However, in May, after a steady decline, pending home sales shot up 44.3%—the highest month-over-month jump since 2001. Many real estate experts and sellers have seen that now is the optimal time in years, to put their homes up for sale.
If you already own an investment property for at least 24 months and rent the property at fair market rent for 14 or more days and personal use is not greater than 14 days or 10 Percent of the time it is rented; you should know about the option of a 1031 tax-deferred exchange. Basically, 1031 exchange is a procedure that allows the owner of investment property to sell it and buy property while deferring capital gains tax. The U.S. Internal Revenue Code allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value. So, what’s the benefit of carrying out a 1031 exchange rather than just selling one property and purchasing another? Tax deferral. A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.
Here are some tips when considering a 1031 exchange in today’s housing market:
1. Sign exchange documents before you close- by doing this, you can take what would otherwise be a sale followed by purchase and turn it into an exchange.
2. Think about who will acquire the replacement property- the same taxpayer who sells the relinquished property must buy the replacement property.
3. Buy enough replacement property to defer all of the gain-you must acquire replacement property that is equal or greater in value than the relinquished property and you must invest all of your net equity from the sale into the purchase.
4. Think about expenses- some expenses such as brokerage commissions, escrow fees, exchange fees, and transfer taxes can be paid with the exchange proceeds that will not cause the deal to be partially taxable.
5. Think about safety- when you do an exchange, your funds are held by the intermediary until you use them to acquire replacement property, so knowing how those funds are held is important before you start your exchange.
Once you understand these points and can decide if this is the best route for you, it’s important to find the right realtor to help you navigate this process. Contact me today to learn more!