Real Estate Investing: What Is a 1031 Exchange?

Real Estate Investing: What Is a 1031 Exchange?

Real estate investing in Washington DC is surging thanks to the average $650K home price. So if you're following up on real estate investing tips, you might try to acquire additional real estate assets for your portfolio. But what about the capital gains taxes that come due?

Your DC real estate investing solution lies with the 1031 Exchange. So, consider some real estate investing advice from Home River Group. Read this 1031 Exchange guide so you don't get stuck with a hefty tax burden. 

And if you're a veteran DC real estate investor tired of a high tax burden, don't dismiss this real estate investing guide. Understanding the 1031 Exchange can improve your real estate ROI. 

1031 Exchange and Real Estate Investing 

A 1031 Exchange is when a real estate investor substitutes a real estate for another. But the caveat is the subsequent capital gains taxes are deferred. Capital gains taxes factor in when you sell an asset like property, stocks, and bonds. 

Washington DC imposes a 3.8% capital gains surcharge. You must pay capital gains tax on your property sales except for your primary residence. Capital gains taxes apply if you've already claimed your $250,000 exception in two years during the property sale. 

The Purpose of the 1031 Exchange 

Thanks to the 1031 Exchange, you get a break from capital gains tax for real estate investing. The IRS, where 1031 comes from, permits a business or a middleman to swap one asset to acquire a new one. You can't, however, personally apply the 1031 Exchange. 

If you have a replacement property in mind, you'll need a complete ROI breakdown. Again, you can rely on our expert rental analysis for a complete financial dossier. 

A third-party, otherwise known as a qualified intermediary, conducts the real estate swap. Also, the qualified intermediary holds the funds in escrow. This prevents you from purchasing non-real estate or spending it.

A successful 1031 Exchange also requires the swapped properties to be similar in value and purpose. Otherwise, you might forfeit the capital gains tax deferral. Of course, you can consult with our Washington DC team about your properties. 

After the sale, you have 45 days to announce the substitute property. Also, consider this real estate advice because there are no extensions. 

The IRS allows you to submit three viable substitute properties in writing. Finally, you have 180 days to close the 1031 Exchange.  

The 1031 Exchange and Depreciation 

Successful real estate investing involves selling appreciable assets. However, some real estate investing tips involve understanding depreciation. Depreciation permits real estate investors to deduct taxes on the property's usage over its lifespan. 

However, you might pay more taxes if you gain more than the depreciated property's worth. This is because the property's depreciated value adds to the property's sale for tax purposes. 

More on Real Estate Investing

Home River Group continues providing unrivaled property management services for over 12,000 properties. We understand that your time and your real estate investments are precious.

To help you maximize your long-term ROI, we screen prospective tenants. And should the unfortunate need arise, we assist in the eviction process. 

Your DC real estate investing portfolio is in good hands with Home River Group. Contact Home River Group today for a free rental analysis.  

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