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Are you getting ready to do a 1031 exchange in 2022? If so, you’re probably wondering what the top trends will be for the year. This article will provide you with all the basics of 1031 exchanges before diving into the top four trends anticipated for these transactions this year. By the end, you’ll be up-to-date and ready to make the best decisions for your real estate investment.
What is a 1031 Exchange?
A 1031 exchange, also known as a like-kind exchange, is a transaction that allows investors to defer paying capital gains taxes on the sale of an investment property by reinvesting the proceeds into a similar property. In order for the exchange to be valid, both properties must be held for investment or business purposes and must be exchanged within 180 days of the sale of the first property.
The 4 Top 1031 Exchange Trends for 2022
1. More people will be doing 1031 exchanges due to the tax laws.
While the new tax laws that went into effect in 2018 eliminated the ability for investors to deduct personal property taxes on their 1031 exchange, the laws also increased the standard deduction. This means that more people will be better off taking the standard deduction rather than itemizing their deductions, making a 1031 exchange less attractive from a tax standpoint. However, there are still many other reasons to do a 1031 exchange, such as deferring capital gains taxes, so we anticipate that the number of exchanges will remain unchanged or even increase in the coming years.
2. The types of property being exchanged will change.
The new tax laws mentioned above also impacted another trend: the types of property being exchanged. Before 2018, investors often chose to exchange properties like vacation homes or rental properties because they could deduct the personal property taxes paid on those types of assets. Now that this deduction is no longer available, we expect investors to exchange more commercial properties and less personal property in the coming years.
3. Exchanges will be used to buy property in Opportunity Zones.
Opportunity Zones are areas designated by the government that offer tax benefits to investors who reinvest their capital gains into these areas. One of the biggest benefits of using a 1031 exchange to buy property in an Opportunity Zone is that you can defer paying capital gains taxes on the sale of your investment property until 2026. This makes investing in Opportunity Zones a very attractive option for many investors, and we expect to see a significant increase in the number of exchanges being used to purchase property in these areas in the coming years.
4. More people will be using Qualified Intermediaries.
A Qualified Intermediary (QI) is a middleman that facilitates 1031 exchanges. The role of the QI is to hold the proceeds from the sale of the first property and then use those funds to purchase the replacement property. This arrangement allows investors to defer paying capital gains taxes on the sale of their investment property. As awareness of this tax-deferred strategy increases, we anticipate that more investors will use QIs in the coming years.
How Do I Know if a 1031 Exchange is Right for Me?
If you’re thinking about doing a 1031 exchange, it’s important to consult with a tax professional to see if it makes sense for your specific situation. There are many factors to consider, such as the type of property you’re exchanging, your tax bracket, and your investment goals. However, if you’re looking for a way to defer paying capital gains taxes on the sale of your investment property, a 1031 exchange may be the right solution for you.
Do I Need a Qualified Intermediary?
While you’re not required to use a Qualified Intermediary (QI) when doing a 1031 exchange, it’s generally a good idea to use one. A QI can help facilitate the exchange and make sure that all of the requirements are met so that you can defer paying capital gains taxes on the sale of your property.
What Are the Risks of Doing a 1031 Exchange?
There are a few risks to be aware of when doing a 1031 exchange. First, if you don’t find a replacement property within 180 days, you’ll be required to pay capital gains taxes on the sale of your investment property. Second, if you don’t follow all of the rules and regulations associated with 1031 exchanges, you could be subject to paying taxes on the sale of your property. Finally, if the value of your replacement property decreases, you could owe capital gains taxes on the difference.
1031 Exchange Process
If you’re thinking about doing a 1031 exchange, it’s important to be aware of the process and requirements. First, you’ll need to identify the property that you want to exchange and then find a replacement property that meets all of the requirements. Once you’ve found a suitable replacement property, you’ll need to complete the exchange within 180 days. Finally, you’ll need to file the appropriate paperwork with the IRS.
The Bottom Line
A 1031 exchange can be a great way to defer paying capital gains taxes on the sale of your investment property. However, there are a few risks to be aware of, and it’s important to consult with a tax professional to see if it makes sense for your specific situation. Reach out to us today for more information about 1031 exchanges and whether or not they’re right for you.