If you’re like most people, you know that a 1031 exchange is a tax-deferred exchange that lets you defer capital gains taxes if you’re buying a “like-kind” property – but what are the rules in California, and how do they apply to you? This guide explains.
Common Questions About 1031 Exchanges in California
A 1031 exchange allows you to put off paying capital gains taxes indefinitely, as long as you buy another “like-kind” (meaning similar) property. Many successful real estate investors use this type of exchange, and it may be the right choice for you, as well.
There are four types of exchanges you may consider:
- Simultaneous exchange, which takes place when the property you’re selling and the property you’re buying close on the same day.
- Delayed exchange, which is the most common type and takes place when you sell your investment property before you purchase another one.
- Reverse exchange, which means you find and buy another investment property before selling your first one.
- Construction or improvement exchange, which allows you to make improvements to the property before your actual exchange takes place.
How Long Do You Have to Buy a Property With a 1031 Exchange in California?
Generally, you must identify a replacement property for the property you sold within 45 days. You must also conclude the exchange within 180 days. However, there are some exceptions – such as when you do a reverse exchange or a construction or improvement exchange. Your REALTOR® and your financial professional can help you identify how much time you actually have.
What Qualifies as a 1031 Exchange in California?
In order for a transaction to qualify as a 1031 exchange (which it must if you expect to defer capital gains taxes), the replacement property must be “like-kind.” That means it’s a real estate asset of a similar nature.
Is it Worth Doing a 1031 Exchange?
Some people believe it’s worth doing a 1031 exchange, and others choose to sell an investment property outright and get it over with. Your unique situation determines what’s best for you. The bottom line is that a 1031 exchange lets you defer paying capital gains taxes, and the only way to avoid ever paying them is to keep the property forever or continue doing 1031 exchanges in the future.
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