Exchanging Your Property to Increase Your Equity
A 1031 Tax Deferred exchange permits real estate investors to defer paying taxes on gains from the sale of their current (relinquished) real estate property. It is not tax free. Please click on the link to access further information about IRS section 1031 Tax Deferred transactions and tax implications.
There are many options when doing a 1031 Tax Deferred Exchange. Earlier this year I chose to sell my rental townhouse and simultaneously buy a single family home. In my situation, I wanted to trade up from a townhouse to a single family residence. Although from an investment standpoint potential future rental income is important, my intention is that my family and I would hopefully be able to occupy the home in the future. I was blessed to purchase my step-mother’s home, Shirley, which was in a trust. My step-siblings offered me the opportunity to purchase it, and I am extremely grateful to them all.
In our market finding a replacement property can be challenging because of the low housing inventory and high homeownership demand. It did take some effort to find the right buyer for my relinquished property and I was able to purchase the home. As a realtor with a great support staff, I was able to close within 90 days, far less than the 180 days allotted by the IRS to complete the transaction.
Throughout the transaction, I worked First American Title Company Hawaii and their exchange company First American Exchange. This ensures that the majority of gain from the sale of the townhome would be deposited toward the purchase of the home. I also withdrew a portion of the proceeds from the sale that was held in escrow and used it toward renovating the home.
[Please note that because I took some money out of the transaction, I will have to pay federal and state taxes on that portion.]
Below is a picture of the townhouse I used to own and my new investment home (before renovations).
If you are a first-time investor and/or considering upgrading your real estate portfolio, please feel free to call me for a complimentary consultation.