Looking to take advantage of 1031 exchange rules for one of the properties you’re managing?
In this article, you’ll learn everything there is to know about the California 1031 exchange for 2023 and beyond.
If you’re new to 1031 exchanges, let’s start from the top.
What is a 1031 exchange, how do they work, and what are the benefits?
A 1031 exchange (sometimes also referred to as a Starker exchange or a like-kind exchange) is a tax deferral strategy used by many successful real estate investors. If you’re currently an owner of an investment property, a 1031 exchange might be the ideal real estate transaction for you if you want to purchase another property while selling off your current one.
What are the benefits of a 1031 exchange?
The primary benefit of a 1031 exchange is the obvious tax deferment.
With a 1031 exchange, you can defer taxes on the investment properties you own or manage indefinitely until you sell, exchanging from one property to another.
This is especially profitable when you consider what this permits you to do, and it opens up a whole collection of added benefits.
Who qualifies to do a 1031 exchange?
The qualifying parties are pretty much all-inclusive. You can do a 1031 exchange if you’re a property investor or you simply own a business property.
And you can perform a 1031 exchange if you’re an:
How Does a California 1031 Exchange Work?
In California, a 1031 exchange allows you, as a real estate investor, to defer the federal and state income tax that would normally be incurred from selling real property, by using the proceeds of the sale to immediately purchase another ‘like-kind’ property.
What are the 1031 exchange rules?
These are some of the specific rules for 1031 exchanges that occur in the state of California:
Needs to be like-kind property - the new property you’re purchasing needs to be “like-kind” the property you’re selling.
Must be the same taxpayer - both the property being sold/exchanged and the property being bought need to be purchased by the same party. If the names on the sale property and the exchange property are different, it won’t be accepted.
Needs to be investment or business property - A 1031 exchange can only be performed with an investment or business property. There was previously a loophole that allowed the use of personal property in some cases, but due to recent changes with the 1031 exchange law, that’s no longer the case.
Property must be of equal or greater value - This one isn’t a full requirement, but it will eat at your tax deferment and essentially nullify the whole purpose of the exchange.
Must follow the 1031 exchange timeline - One of the most confusing aspects of this whole process is the 1031 exchange timeline you have to perform the exchange.
There is a 45-day identification window where you will have 45 days from the close of the sale to find as many as three like-kind properties. And there is a 180-day purchase window where you will have 180 days to purchase a replacement investment property and complete the 1031 exchange.
Ready to take advantage of the 1031 exchange in California?
If you feel like a 1031 exchange is right for you, it’s essential that you know what you’re doing and follow all of the rules. The first step is to always ensure you have the right agent by your side.
Avoid rushing into the purchase of a property because doing so puts you at a severe disadvantage and weakens your negotiating position. Keeping all the legalities straight can also be very challenging which is why having the right agent by your side will make all the difference in 1031 exchanges.
At Marty Real Estate, we have years of experience and can optimize every step of the investment process. By offering competent investment ideas and guidance, we put our clients' investments first. We provide a premium investing experience and help our clients achieve maximum value and often greatly increased cash flow from rental income. Contact our team today to chat with us about your financial goals for 2023 and your 1031 exchange options.