1031 what is it and how does it work?

I love to learn new things.

Each day, during my commute, I listen to audio podcasts of the Dave Ramsey show.

What is a “1031”?

Sounds like police code for “speed trap”.

Don’t get me wrong. I’m glad the police are there to keep chaos off the street and out of my house, but I think we commuters pretty much have this “getting to work in the freeways” handled….

But the 1031 actually a cool thing.

It can legally protect you from taxes when selling real estate.

Here’s how it works:

Imagine we are far away from 2008 and you have equity in your home or rental property.

I know. I see a beach with palm trees and tiny umbrella drinks too…

Let’s be wild and say that your home is worth $100,000 more than you paid for it. This has yet to happen for me in real estate but I like to dream…

If I sold the property outright and bought no new property, guess how much the government would take?

$15,000 smackaroos.

Ouch!

How do you avoid that tax and not feel like you have to find another house way out in the ‘burbs by the next day?

By buying 1 or more other properties and using a 1031 “exchange”.

The 1031 keeps the $100,000 in “escrow”.

Not snails.

A real estate account held by an accredited title company that can handle a 1031 account.

This money is held for you by the title company until you purchase your next property or properties.

Yes, I said “propertieS”.

You could buy 1 $100,000 place or 2 $50,000 places and avoid the $15,000 tax. You have 45 days to find new propertie(s) and nominate them. Six (6) months from close of the sale of the old property.

*Accredited title company
*1031 escrow account
*6 months
*legally avoid tax

And no eating of gastropoda.

Win!

Sell a rental property
Hold in escrow by title company cert by irs

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One thought on “1031 what is it and how does it work?

  1. Some housing experts says that it took 10 years for the housing bubble to form so it should take 10 years for it to recover.
    Keep your fingers cross that it will happen sooner.

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