If you’re looking to start investing in real property, consider looking into a Florida 1031 Exchange. In short, a 1031 Exchange in Florida is a way for an investor to essentially “exchange” one property for another without having to worry about the burden of taxes right out of the gate. It’s an incredible opportunity for you to purchase a property, giving you the advantage of both time and money in an explosive market.

If you’re an investor and considering doing a 1031 Exchange in Florida, here’s a little more information to help you learn more:

What Exactly is a 1031 Exchange?

To put it briefly, a 1031 Exchange is a real property swap from one property to another while being able to delay payment of federal capital gains taxes that can hurt your profits. It’s a business-savvy way to invest in real property without having to stress about the taxes that come along with it, at least right away.

1031 Exchanges get their name from Section 1031 of the Internal Revenue Code, which allows business owners or owners of an investment property to defer or delay their taxes on some purchases of real estate. These purchases need to be of like kind, so of similar square footage, similar usage, or something along those lines.

Before you jump into a 1031 Exchange, it’s important to discuss the tax implications with your accountant. In our view, a 1031 Exchange, it’s a great way to start building up revenue for your property, as long as you follow the set guidelines laid down by the IRS.

In a Florida 1031 Exchange—and nationwide—all proceeds must be held by a third party, like an investment company. The money from the sale does not go to you. Instead, it goes to the third party to hold while you find a new property to purchase in its stead. The best part? There is no rule on how frequently you can do these exchanges, so once you start establishing your inventory, you can do several a year if that’s something you’re interested in.

1031 Exchange Timeline Rules

Sometimes, it can be hard to find the exact property that you want to purchase once you begin the 1031 process. It’s worth noting that some time constraints have to be in place.

Within 45 days of selling your first property, you must report the property to the third party that you wish to purchase for your exchange. The third party is the investment company or 1031 exchange company that holds your money in the interim. You may provide up to three potential properties to the third party, as long as one of those properties is the one that you close on at the end of the process.

The second rule is the 180-day rule. Within 180 days, you must close on one of the properties reported to your third party to avoid paying capital gains.

What’s most important to remember is that these periods run concurrently, meaning that if you wait the full 45 days to choose your property, you only have 135 days left to close on it. This can be a real time crunch, especially if the property you’re trying to purchase is a large commercial property.

What Does Doing a 1031 Exchange Mean for My Taxes?

When you do a 1031 Exchange, you’re essentially deferring the taxes on your property so you don’t have to worry about the tax liability on property sold or purchased right away. If you have cash left over at the end of the 180 days, that money can be taxed as capital gains. You have to be careful to use up the money for your purchase, or you will have to be prepared to pay those extra taxes!

Don’t forget to consider any mortgage loans or other debt on the property that you sell in the exchange, like IRS liens or other liens by contractors. Those loans need to be paid off upon selling the property, and those payments are considered part of the purchase price. For example, if you are selling a property for $250,000, but you have a mortgage lien on it for $100,000, that money must be paid off first before doing anything else.

A 1031 Exchange in Florida can be tricky if you don’t know all the rules, so it’s of monumental importance to get people surrounding you who know all the rules, like a solid financial advisor and a real estate agent and attorney who know what they’re doing. You should also speak with your third-party investment company or one of the 1031 exchange companies in Florida, who should have a wealth of knowledge on the subject as well.

Important Things to Note in Florida

Vacation homes are huge in Florida, which is known for its beautiful weather and travel destinations. Many people in the Florida area will buy vacation homes via the use of the 1031 Exchange. However, it’s important to note that 1031 Exchange companies know that people want to use them to purchase vacation homes, which means Florida gets an extra sharp eye!

If you purchase a vacation home, your personal usage of the home cannot exceed more than 14 nights per year. The rest of the time it should be rented out or available for rent unless repairs are being done or renovations are being made. Otherwise, the vacation home is counted as a personal residence, and there can be tax implications for that outside of 1031.

Looking for the Right Property

Alec Salameh wants to make sure that you’re getting exactly what you want, whether it be a vacation home by 1031 in Fort Myers or a new personal residence. Our experienced agents at Coldwell Banker Fort Myers are committed to giving you the best possible customer service, up-to-date real estate information, and more. If you’re interested in doing a 1031 Exchange in Florida, we can help.

If you’re interested in speaking with Alec Salameh, contact us today for more information.

By Alec Salameh

October 13, 2022