GMAC Real Estate 1031 Exchange Basics
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1031 Exchange Basics

Takeaways

  • SA 1031 exchange is a powerful tool to trade investment real estate.
  • An exchange for property equal or greater in value from the traded real estate is completely tax deferred.
  • Keep up the strict deadlines on naming, and buying the replacement property.

Did you know?

  • The 1031 exchange is also known as a "Starker" exchange and is named after the first taxpayers to get federal court approval for this investment tool.
Trade one set of keys for a new investment second home.The Internal Revenue Code 1031 exchange, also known as a Starker exchange, is a powerful tool investment second home owners can use to sell their existing real estate and purchase new property with all capital gains taxes deferred as long a certain criteria are met. A 1031 exchange is considered a “like kind” exchange of property. This exchange can be tricky and should be conducted through the services of a Qualified Intermediary, also referred to as an Exchange Accommodator. This independent party helps accommodate both the sale and subsequent purchase transactions.

Before pursuing a 1031 exchange remember this option is only available for investment property. If you’re not sure if your second home is considered investment real estate, check where it falls in the four tax categories for second homes. If you use your second home for no more than 14 days in a year, or 10% of the days rented if that number is greater, the IRS will consider your second home investment real estate.

The Clock is Ticking

Once you begin the 1031 exchange process you have 180 calendar days dating from the closing of the sale of your investment second home to complete the exchange process into your new investment real estate. After closing on your sale the first deadline hits at 45 days. By this date, through your Qualified Intermediary, you must designate your candidate property, or properties, and identify them to the IRS.

The penalty for missing either deadline is the funds in the trust held by your QI from the sale of your investment second home will be liquidated and the proceeds are taxed on capital gains and depreciation recapture. This tax hit can be substantial so it’s important to get into a 1031 exchange carefully to ensure every step is completed correctly and on time.

The reward for a successful 1031 exchange is you can use the proceeds from the sale of investment second home to purchase another piece of investment real estate – within 180 days of the sale, of course. The real benefit is if the price of the replacement property is equal to or greater than the sale price of your relinquished real estate, no tax is immediately due. That tax is deferred, plus the tax basis of your relinquished real estate becomes the tax basis for the replacement property.

A 1031 exchange is a powerful tool for selling and buying investment second homes, but it requires very specific actions and is best handled after receiving competent tax advice. And don’t try to deceive the IRS by trying to make a second home you personally use too often qualify as an investment property. You might not get audited, but every 1031 exchange is subject to review by the IRS.

Search for Second Homes for Sale

To search for a selection of second homes for sale, please visit the website of a GMAC Real Estate Office that serves the area where you'd like to buy a second home. To learn more about buying Second Homes or Vacation Homes, explore the rest of this section, or contact a GMAC Real Estate Agent.