What Is a 1031 Exchange?

Dave Knight Real Estate Group Podcast

How do you deal with a 1031 exchange? Today I’ll be answering this question for you so that you won’t be confused when you hear this term in your real estate dealings. First, what even is a 1031 exchange? I’ll use an example to help me explain. My friend Brian purchased a small condo in Azusa (sp?) for a couple hundred thousand dollars. He sold it recently for over $400,000. He shifted that money in Azusa to purchase three properties in the Midwest. Normally, he’d have to pay capital gains on it, but he did a tax-deferred 1031 exchange to acquire those other three properties. You’re probably asking how that works. When you’re selling that original investment property—whether it’s land, an apartment, or a house you have rented out—have a term in your contract that states that the buyer is to accommodate the 1031 exchange at no cost to the buyer. When you sell that property, the time periods are tied to the 1031 exchange. You have 45 days to identify three other properties you’re interested in buying, and you have 180 days to close on at least one of those properties. The tightness of the time period can make the process pretty intense, so what do you do about that? When you’re selling the original investment property and are worried about time periods, a great thing to do is make a longer escrow period. For example, you could make the close of escrow 60 days or sooner by mutual agreement. The downside to this would be that when the buyer doesn’t agree to that period, you may not close in time. When you’re in escrow, you can hire a 1031 exchange company that will help oversee the exchange. We can connect you to such a company, but it’s actually a very simple process—it’s just time intensive. “It’s actually a very simple process—just time intensive.” The trick is to know what you’re ideally looking to buy after you close escrow on that other property. If you’ve got specific questions about 1031 exchanges, feel free to reach out to me. I’ll do what I can to advise you on navigating the process.