Can I Do a 1031 Exchange on a Rental Property?

1031 Exchange on a Rental Property

A 1031 exchange is a commonly used real estate transaction where you can swap out an investment property for another like-kind property, which helps you avoid paying capital gains tax. Without the 1031 exchange, you normally would have to pay taxes as soon as the sale occurs.

However, if you do a 1031 exchange on a rental property, you could put the money you make from selling the first property and invest it into another rental property without paying capital gains tax. It can be a complicated process and requires following rules and guidelines with the help of a lawyer.

With a 1031 exchange, an investor can sell one or more rental properties and buy new rental properties without paying taxes on the gains. There are several requirements to consider:

  • The replacement property to the original property must be of equal or greater value.
  • Both properties, the investment property and the newly acquired property, must be like-kind and only apply to business or investment properties. Some like-kind properties include apartment complexes, commercial properties, or vacant lots and cannot be personal property.
  • The cash received from the sale of the investment property must be used to buy the new property. A qualified intermediary (QI) will hold the cash received from selling the first property, which would then be used to buy the next property.
  • The tax returns and titleholders of both properties must remain the same.
  • There are time limits in a 1031 exchange. After the first property is closed upon, you have 45 days to identify up to three like-kind replacement properties. A replacement property must be closed within 180 days after the original property is sold and does not start once you have identified a replacement.

1031 Exchange Benefits

There are some rules to abide by if swapping an investment property to a rental or vacation home. You can acquire the proceeds from the sale of the investment property and roll them into the vacation rental, which will increase the value of the investment property. However, to do so, you must rent the rental property for more than 14 days per year during the first two 12-month periods. You personally can use the rental property for only 14 days or fewer every year, as well as no more than 10 percent of the nights rented.

Furthermore, the rental rates you charge must be at fair market value. If you rent your property to a relative, charging them under fair market value may count as personal use, which violates the 1031 exchange. Additionally, you can work on the rental property and improve it without violating the 14-day limit, which means you can stay there as long as you are improving it.

Another benefit of the 1031 exchange is that there are no limits to the amount of times you perform a 1031 exchange, meaning you can roll over the capital gains from one property to another as often as you would like.

A Qualified Intermediary at 1031 Federal Exchange Can Help With Exchanges on Rental Properties

If you need legal assistance with a 1031 exchange on a rental property or any like-kind property, then speak with our qualified intermdiary at 1031 Federal Exchange. Call us at 513-450-3039 or fill out our online form for a free consultation. Located in Loveland, Ohio, we proudly serve clients nationwide.