Compass Greater NY, LLC
Ann Marie Damashek, GRI, CBR, SRES, Compass Greater NY, LLCPhone: (917) 623-0624
Email: [email protected]

1031 Exchanges: What They Are and What You Should Know

by Ann Marie Damashek, GRI, CBR, SRES 06/06/2021

Photo by Tima Miroshnichenko from Pexels

“1031 exchange” or “like-kind exchange” are terms you may have encountered in the real estate world. While the name might make it sound like a tax form, it actually refers to an entire type of business transaction. If you are interested in buying or selling investment property, it’s important to understand what this type of transaction entails. Once you learn the basics of 1031 exchanges, you’ll know what to expect and if you may benefit.

A 1031 exchange is a specific type of transaction involving the sale of an asset specifically as to avoid losing profits to taxes. In real estate, this would mean selling an investment property and using the money earned toward acquiring a different investment property. This way, the seller can avoid paying certain taxes they would normally be liable for in the property's sale.

What Type of Taxes Can Be Deferred?

According to Investopedia, the most common reason to use a 1031 exchange is to defer capital gains tax. Capital gains tax is based on the difference between the price you paid for an asset and the price you sold it for. Therefore, a bigger profit equals higher tax. When you complete a 1031 exchange, you may defer that tax as long as you don’t gain any additional monetary benefit from that original sale. You can technically defer this tax indefinitely, saving money to use in future investments.

Another tax incurred by selling a property is known as depreciation recapture. This tax is in place to balance out the deductions property owners can claim for depreciation in their tax returns. Depending on the seller’s tax bracket, this can add up to a big number on the tax bill for a property sale. 1031 exchanges can also allow you to defer this depreciation recapture tax to save money.

What Does Like-Kind Mean?

One of the key requirements for an 1031 exchange is that the property you buy must be “the same nature or character” as the property you sell, according to Millionacres. Though it might sound like it, this rule does not limit you to purchasing the same type of property in terms of style, function or size. You may “exchange” a retail property for a duplex, for example. You may even sell a plot of undeveloped land for a fully furnished office building. The “like-kind” requirement refers to the purpose of the acquisition rather than the literal purpose of the property. The required purpose is to hold on to the property as an investment.

I Want to Flip a House. Can I Use a 1031 Exchange?

There is an important difference between intending to hold a property as an investment versus the intent to sell that property quickly for a profit. Technically, there are no specific guidelines about how long you need to hold on to a property for it to be eligible for a 1031 exchange. However, most properties bought to “fix and flip” are not likely to be approved for this type of transaction. Always consult a qualified tax professional if you’re unclear about what does and doesn’t qualify as an investment property.

A 1031 exchange can be a great strategy for real estate investors. Though it’s a long and complex process, knowing the basics of the term will help you navigate the financial side of the real estate world with more confidence.

About the Author

Ann Marie Damashek, GRI, CBR, SRES

Ann Marie Damashek has always been a natural at helping people prepare their homes for sale. She started out with a successful business selling goods for people on eBay. "Nine times out of ten they were hiring me because they were down-sizing,” Ann Marie says. "So I decided to get my license. I said, ‘Might as well sell their house too.’” The transition was a smooth one and for nine years she’s had a thriving full-time real estate business that allows her to marry her entrepreneurial spirit with her passion for helping others. With an office in Larchmont, New York, she serves all of Lower Westchester County, with her primary market in the Sound Shore region. The majority of her business is "sphere of influence” with former clients referring her to friends and family. A gifted communicator, Ann Marie quickly builds trust and rapport with her clients by being both thoughtful and responsive; she understands that during the purchase or sale of a home, a quick response time is crucial. "I am very accessible,” Ann Marie says. "I always make time for my clients. They can call me, text me, email me up until 10 o’clock at night and I will respond. I’m available on weekends. I get back to people very promptly. I’m very customer service-oriented.” Her clients appreciate her professionalism, passion and enthusiasm and as a result her repeat and referral rate continues to grow each year. While selling real estate is serious business, Ann Marie knows that at times humor and a moment of levity can be a relief to clients. While she has a laidback and easygoing personality, she can be assertive when needed on her clients’ behalf. She loves being of service to them, and the continually changing nature of the work keeps her engaged and fulfilled. "It’s never boring,” Ann Marie enthuses. "Every day is different. That’s probably what I like most about it. But I also enjoy helping people sell or buy and educating them about the process. I love helping them achieve their goals.” This ethic of service has resulted in well-deserved recognition. Ann Marie has received the Westchester Magazine Five Star Real Estate Agent Rating four years running, in 2015 and 2016 she was the #1 agent in her office, and she’s a Zillow 5-Star Premier Agent. To keep in touch with former clients, Ann Marie sends cards to mark special occasions or reaches out via email. To market her listings, Ann Marie uses Multiple Listing Services (MLS), as well as, a service that allows both agents and their clients access to MLS data. She also uses a Facebook business page and ads to boost new listings or promote upcoming open houses. "That drives a tremendous amount of traffic,” Ann Marie says. She also uses the most popular real estate websites such as Zillow and Trulia. A strong believer in giving back, Ann Marie sits on the Board of Trustees of her church and is involved in a variety of social justice projects. She’s affiliated with Furniture Sharehouse, a furniture bank for Westchester County, which collects and distributes gently used furniture free of charge to those in need. "I love it on so many levels because as a realtor, it’s helps my sellers downsize through charitable donations. I like the environmental aspect of it as well. And it helps people who truly need things.” She’s also involved in Impact 100, a women’s philanthropic giving organization. In her free time, Ann Marie enjoys gardening, traveling, and spending time with family and friends. For the future, Ann Marie wants to continue expanding her business and developing her brand, and she someday hopes to grow a strong team. But her main goal is to stay in the real estate business, helping her clients to achieve their dreams.