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Real Estate Investing: What Is a 1031 Exchange?

Real Estate Investing: What Is a 1031 Exchange?

San Mateo real estate investing maintains its lucrative and exclusive edge with an average selling price of $1.4 million. This white-collar coastal San Francisco Bay Area city is home to tech companies like NetSuite and Coupa Software. So, San Mateo presents possibilities for high-end and stable rental income. 

But is the prospect of capital gains tax putting you off from investing? Here's some free real estate investing advice. Read this 1031 exchange guide to learn how to avoid capital gains taxes for years. 

And if your real estate portfolio is full, perhaps a 1031 exchange guide is the answer. Understanding how a 1031 exchange works with our expert property management enhances your ROI.  

1031 Exchange for Real Estate Investing

A 1031 exchange involves real estate investors exchanging one asset for another. The aim is to defer any capital gains tax legally. Also, the IRS assesses capital gains taxes as short-term or long-term. 

However, like the rest of California, San Mateo pays capital gain tax as ordinary income. And the IRS permits investors to use the 1031 exchange without limit.  

This is how real estate investors can legally not pay capital gains taxes for years. The term 1031 exchange comes from IRS Section 301

How to Use a 1031 Exchange

Under some circumstances, you can involve your principal residence in a 1031 exchange. However, the IRS doesn't allow you to handle or receive the proceeds personally. 

Instead, a qualified intermediary gets involved with a 1031 exchange. Throughout the process, the funds go through an escrow account. The 1031 exchange stipulates that you can only apply towards acquiring a new real estate asset.   

Also, some sound real estate advice involves acquiring like property. For example, you can use a 1031 exchange to swap your apartment complex for a vacant lot. Of course, you can rely on our rental analysis to compare prospective San Mateo properties. 

But, the caveat is you must use it for real estate investing purposes. Also, the like properties must be of similar value. Otherwise, you might face depreciation recapture. 

1031 Exchange and Depreciation 

Depreciation involves real estate investors writing off the value of the investment property over its lifetime. Without using a 1031 exchange, depreciation accounting can reduce your burden. 

However, if you sell your current property under a 1031 exchange for less than it's worth, prepare for depreciation recapture. Through depreciation recapture, the remaining depreciation value passes onto your tax liability. 

1031 Exchange and the 45-Day Rule 

After 45 days of concluding the sale, the qualified intermediary can release your funds. Again, you can't use the funds for anything but acquiring a new property. 

Also, you must submit three viable San Mateo properties for the 1031 exchange in writing. But don't be late because the IRS doesn't grant extensions.

After 180 Days  

After selling your property, you have 180 days to close on acquiring the new property. Under some circumstances, a 1031 exchange permits you to acquire the new property before selling your old one. Then, you can rely on Five Star Property Management to screen your tenants for steady rental income. 

More About Real Estate Investing in San Mateo

The potential for lucrative real estate investing lies in the San Francisco peninsula. And Five Star Property Management is here to protect your ROI. 

Besides San Mateo, we offer exemplary property management services throughout San Mateo County. We also provide exquisite property management services for San Francisco and parts of Santa Clara County. 

Five Star Property Management handles all necessary property maintenance. And should the unfortunate need arise, we will assist in the eviction process. 

Contact us today about your next San Mateo rental property. We also have offices in nearby Burlingame and San Francisco.  

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