Tax-Deferred 1031 Exchange: Part 2

Los Angeles and South Bay Real Estate Video Blog with Lenny LaRocca

We're back with the second portion of our video series on real estate investing and the 1031 exchange. Today we're discussing what it takes to qualify.

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For the second portion of our two-part series about the 1031 exchange in property investments, I'm joined once again by 1031 exchange expert Phil Antwan.

You can see the first portion of this series here.

As I mentioned before, I get lot of questions about the 1031 exchange from clients. Another common question is about which entities can complete a 1031 exchange. Phil points out that any entity can complete the exchange–a trust, an individual, a family trust, an LLC, an s-corp, a c-corp, a partnership, an LP, joint venture–any taxed entity can do a 1031 exchange.

They can also acquire this property anywhere in the country, which is wonderful. For instance, if you're selling property here in California and you need to acquire property on the East Coast or the South, the state and federal governments will allow you to exchange that asset for one or multiple properties throughout the country.

The bottom line, according to Phil, is that the IRS says that when you go into this exchange, you have to go into like-kind property. A lot of people get confused by this, but really, "like-kind” by definition means any investment real estate to any investment real estate. In other words, it can't be your primary residence, or your second home, or a vacation home. To qualify, it has to be a property that you use for business, as an investment, or to collect income from. You could sell a vacant lot here in California and buy a condo in Hawaii and still qualify for a 1031 exchange.

With the 1031 exchange, you can acquire property anywhere in the country.

The goal is to acquire the new property for equal or greater value than what you sell for and to move all the equity from the sale into the purchase. If you do that, the federal government will literally defer all capital gains taxes as you acquire a new investment asset.

So which properties do and do not qualify? Phil reminds us that your primary residence will never qualify, nor will a second home or vacation home. However, if you live in a duplex or a triplex, you can actually exchange the investment portion of the sale and take advantage of the primary residence portion of the sale, so in effect, you're using the property for two different uses: personal use and investment use. You can definitely separate that use via your CPA and do a 1031 exchange.

We hope you learned a lot from our two videos about the 1031 exchange and all the benefits it provides to you as an investor. If you have more questions about it, please call Phil at [phone].

If you have any questions about real estate or you're thinking about buying or selling in California, give me a call. We're both happy to help!