Learn how to defer capital gains taxes by reinvesting in like-kind properties, ensuring more of your profits stay invested.
If you’re an investment property owner looking to sell, taxes can feel like a storm cloud looming over your profits. But what if there was a way to navigate around it? The 1031 exchange could be the lifesaver you need, and I recently sat down with 1031 expert Bill Haron to get to the heart of how this tax-deferral strategy works.
“The devil’s in the details,” Bill reminded me. And he’s right. Without a clear understanding of the process, you could pay far more taxes than necessary. But with Bill’s insights, you’ll be ready to make confident, well-informed decisions.
What you need to know about the 1031 exchange. I started by asking Bill a question on many property owners’ minds: “Is it really possible to defer taxes when moving from one property to another?” Bill explained it simply: “When you sell an investment property, the goal is to reinvest the proceeds into another ‘like-kind’ property. By doing so, you defer capital gains taxes and keep more of your money working for you.” You have to remain the new property owner like you owned the previous one. If the property you sold was under your name, the new one should also be.
"Most of the gain gets deferred into the new property, but the taxes can follow you if you’re not careful."
Can you buy with a partner? One of the most common questions is: “Can I join forces with others to buy my replacement property?” Bill responded clearly: “Yes, you can, but the structure matters. You can buy as tenants in common, where each person holds an undivided share. However, you must keep your ownership consistent with how you owned the original property.” If your original property was under your Social Security number, the new one should be. Even if you’re using an LLC for protection, it has to be a single-member LLC to maintain the tax-deferral status.
What about sale proceeds and taxes? I pressed Bill further: “So if an owner sells for one price and buys for less, what happens to the difference?” Bill didn’t sugarcoat it: “That difference, called the ‘boot,’ is taxable. Let’s say you net $800,000 from your sale but purchase a property for $725,000. This leads to a delta of approximately $65,000 to $67,000.” He added that you should expect a blended tax rate of about 25%, covering federal capital gains, depreciation recapture, and state taxes. Consult your CPA for exact figures, but know that boot taxation is real and can catch you off guard.
Can you use your investment property? Now, this part was intriguing. I asked Bill, “What if someone wants to use their investment property as a vacation home?” Bill shared, “The IRS is clear: personal use of your 1031 exchange property is limited to 14 days per year. Go beyond that, and the IRS might decide it’s a second home, not an investment property.” Stick to this rule, and your investment stays secure. Go over it, and you risk reclassification that could derail your tax benefits.
Many investors are swapping annual rental properties for high-yield vacation spots—like beach houses or cabins by the lake. Bill pointed out that a 1031 exchange lets you pivot without taking a capital gains hit as long as you play by the rules. Bill summed it up best: “Most of the gain gets deferred into the new property, but if you’re not careful, the taxes can follow you.”
Before you sell or buy, speak with a real estate expert and a tax professional who understands 1031 exchanges. Bill Haron, who handles more than 160 exchanges each month, emphasized the importance of guidance: “The process isn’t something you want to tackle on your own. A misstep can cost you big.”
Don’t let confusion or mistakes drain your profits. Reach out to an expert like Bill or your real estate advisor to make sure you’re set up for success. Ready to explore how a 1031 exchange could benefit you? Contact me at (571) 765-1038 or [email protected], and let’s talk and develop a strategy that will keep more money in your pocket and set you up for long-term success.
