1031 Exchange – 3 Tips from a Real Estate Lawyer

1031 Exchange – 3 Tips from a Real Estate Lawyer


– Are you thinking about
selling an investment property but are concerned you’re gonna get hit with a large tax bill if you sell it? Check out this video on 1031 exchanges and learn how you can
defer your tax liability. (upbeat music) Hi, Barry here with the LawFull channel. On this channel you’re gonna find short legal videos on the
topics that affect your life. If you haven’t subscribed
yet, please do so. If you have any legal
questions or comments, feel free to reach out to me. If I can’t help you, I’ll
find someone who can. Hi. I’m in downtown Chicago
with real estate attorney Junilla Sledziewski. We’re talking about 1031 exchanges, so the first question we need to ask is, Junilla, what is a 1031 exchange? – Sure, a 1031 exchange is the sale of one investment
property and exchanging it for a second investment property. By doing that, you don’t
have to pay any tax immediately on the sale of
the first investment property. – So you can just exchange
any property you want? Or does it have to be a specific property? – No, you can only exchange
like kind property. Typically that would refer to the property either being real estate
or personal property. For our purposes we’re going
to talk about real estate. It can only be property
that’s held for investment. A lot of people ask, well,
can I buy and flip homes? Typically, that is not going to qualify as an investment property because you have to hold
it for a period of time. Typically we recommend that the property is held at least 12
months if not 24 months in order to fall into
that investment category. Properties that are held
perhaps to be rented out or maybe they get land that’s held for 20 years in order to appreciate, or maybe ultimately develop, those are examples of investment property. – Has the new tax code changed the way that people are using 1031 exchanges? – Yes, effective January 1st of this year you can no longer do a
personal property exchange. That would be a situation where maybe someones trading artwork for artwork, or baseball cards for baseball cards. Those used to be opportunities for people to take an increased
value of a piece of art and exchange it for maybe
two new pieces of art, right? – But is there any difference
now from the tax code as it affects real estate? – No, real estate is
still available to be used in a 1031 transaction. – I’m curious. What are the primary
benefits, the real benefits, of using a 1031 exchange? – Well, the primary
benefit is deferral of tax. But, because you’re deferring tax, that also results in additional equity that you can roll into a new property. So it helps to maximize the
value of your existing property and roll it into a new property so that you can continue to
make your money work for you in a way that’s more efficient than say, completing a sale and paying
tax on the sale right away. – Do you have any tips for people from a real estate lawyer’s perspective on what they should look out for when dealing with 1031 exchanges? – Yes, absolutely. My first tip is to gather your team early. You’re going to need a tax accountant, an attorney, real estate
brokers, financial advisor, a qualified intermediary, a title company. All of these players need to work together to make it happen. So you want to gather
them as early as possible. Make sure everyone’s
communicating and understanding what’s going to take place
throughout the process, because the timelines
are very, very important. That leads to my second tip, which is to identify your
replacement property early. Once you close your first transaction, you only have 45 days
to identify the property that you want to exchange it for. You really have to be on
top of the ball with that with your real estate broker in identifying your
replacement property quickly. Then the final tip that I have is, the 1031 sounds like a great idea, right? Who wants to pay taxes
if they don’t have to. But it’s not for everybody. Investing in real estate typically means that your liquidity is
somewhat restricted. You don’t have access to cash immediately. If you are in a situation where
you’re going to need cash, you want to just be
careful getting into a 1031 or any real estate investment, in terms of your overall
investment strategy because you do want to keep your liquidity and cash flow in mind. – Okay, well, Junilla, thank you very much for talking with us today
about what seems to be somewhat of a confusing topic. If you are thinking about
engaging in a 1031 exchange, feel free to reach out to us. I’m happy to put you
in touch with Junilla, and we can see if she can
help you going forward. Now it’s time for your take on the law. Have you dealt with a
1031 exchange before? What was your experience like? Tell us about it in the comments below. Hey, thanks for checking out this video. If you want to see more short videos on the legal topics that affect our lives, please consider
subscribing to our channel. If you have any questions or comments on any legal related matter, please feel free to reach out to me. If I can’t help you, I’ll
find someone who can. (upbeat music)

Leave a Reply

Your email address will not be published. Required fields are marked *