Are you considering selling a current investment property in Arizona and buying a new one?
Then you’ll want to know about a 1031 exchange for rental properties. With a 1031 exchange, you can sell your rental property without paying any capital gains tax, as long as you use the proceeds to buy another investment property.
What Is A 1031 Exchange for Arizona Property Owners?
A 1031 exchange, a like-kind exchange, is an IRS-approved transaction in which you sell one investment property and purchase another while deferring the capital gains taxes. The Internal Revenue Code (IRC) Section 1031 allows investors to roll over all proceeds from the sale of the original asset into a new one of equal or greater value.
To qualify for a 1031 exchange, you must follow all the IRS rules and regulations. It is important to note that not all real estate types qualify for a 1031 exchange. Generally, investment properties such as rental homes, commercial buildings, and land used for investment purposes are the only ones to qualify.
Properties used primarily for personal use, such as vacation homes and primary residences, cannot be used for a 1031 exchange.
Who Should Use 1031 Exchanges?
Real estate investors in Arizona should consider using a 1031 exchange if:
- They’re looking to reinvest in the local real estate market
- They would earn a high capital gain from selling their property
- They want to diversify their property investment portfolio
The Benefits of a 1031 Exchange in Arizona
A 1031 exchange provides many benefits to real estate investors in Arizona.
Deferred Taxes:
By using a 1031 exchange, investors can delay paying capital gains taxes (which can be nearly 25%) on the sale of their investment property, which allows them to reinvest more money and potentially earn a higher return on investment. This practice can be especially valuable in Arizona where property values have increased.
Portfolio Diversification:
Using a 1031 exchange allows investors to diversify their investment portfolio by exchanging one type of property for another without incurring significant tax liabilities. For example, selling a small multifamily property and using those proceeds to invest in a commercial retail property.
Access to Higher-Quality Properties:
Since you’re saving a large chunk of change on capital gains taxes on the transaction, Arizona investment property owners can leverage a 1031 exchange to upgrade to a higher-quality property with a better potential for growth.
For example, investors can sell a small apartment complex for $750,000 and defer a capital gains tax of about $150,000. That extra money can go a long way toward a better opportunity.
Tips for 1031 Exchanges in Arizona
If you’re thinking about selling your Arizona rental property and using that money to reinvest in a different investment property, then you’ll want to consider a 1031 exchange. Here are some 1031 exchange tips to keep in mind:
- You'll need a qualified intermediary (see below) to complete the exchange and meet all IRS regulations.
- Be aware that there is a time limit associated with 1031 exchanges. You must identify the replacement property within 45 days of selling your original asset and complete the exchange within 180 days.
- Research to ensure you get a good deal on the replacement property. Don’t take a bad deal just because you feel like you have extra money to spend.
What’s a Qualified Intermediary for a 1031 Exchange?
You must use a qualified intermediary to complete a 1031 exchange in Arizona.
A qualified intermediary will handle the paperwork and arrange the fund's transfer between the parties. Selecting an experienced and reliable intermediary who understands all the requirements to complete the 1031 exchange process is important.
What Makes a Good Qualified Intermediary for 1031 Exchanges?
An experienced, qualified intermediary:
- Has extensive real estate experience in Arizona
- Has completed compliance examinations
- Knows the tax laws in-and-out
- Offers transparency in transactions
- Transfers fund securely through an FDIC-insured account
Ultimately, the qualified intermediary will protect you from making any mistakes during the 1031 exchange process and will also ensure that your funds are being used correctly so you won’t face big tax problems later.
Why Consider a 1031 Exchange in Arizona?
Arizona is excellent for 1031 exchange strategies due to its thriving real estate market and attractive tax rates. Buying rental property in Arizona through a 1031 exchange can reduce your tax bill, increase your net worth, and diversify your portfolio.
In addition to its thriving tourism industry, Arizona has a robust economy and many corporate headquarters. It's a great place for real estate investments, with its steady appreciation rates and attractive tax rates.
Whether you're new to real estate investing or are an experienced investor looking to maximize your return, Arizona is an excellent destination for 1031 exchanges. With the right qualified intermediary and strategy, you'll be well on your way to making more money with fewer taxes.
How Does Brewer & Stratton Property Management Help?
Brewer & Stratton Property Management has experience helping investment property owners with the 1031 exchange process in Arizona. As a Phoenix property management company, we can also help you identify and acquire the best properties for your portfolio.
Contact us today to learn how we can help you succeed in your Arizona rental property business.
Brewer & Stratton Property Management serves the Greater Phoenix area with full-service property management, including rental property marketing, tenant acquisition, rent collection, tenant maintenance requests, routine inspections, turnover services, and everything else related to your success as a rental property owner.
