Understanding 1031 Exchanges: Tax Benefits for Albuquerque Investors - Article Banner

If you’re not yet familiar with a 1031 exchange, it’s worth learning about the benefit this type of transaction can provide to real estate investors in Albuquerque. The 1031 exchange allows you to defer the capital gains taxes that you may owe after selling a property by reinvesting those earnings into a new piece of income-producing real estate.  

Understanding the 1031 Exchange

This is primarily a tax benefit, but there are a lot of other advantages available to investors who use the 1031 exchange. It allows investment property owners to defer the taxes that may be due on the sale of a property by investing those profits into the purchase of another property. 

When you sell a rental property, you’ll be responsible for paying capital gains taxes on your earnings. But, if you’re willing to use the proceeds from the sale of your property to buy another income-producing property, you won’t lose any of that profit to taxes. You’ll defer those tax payments instead.

Rules and Timelines in a 1031 Exchange

You have to exchange like properties to take advantage of the 1031 Exchange. This means you can’t sell the home you’ve been living in and then avoid capital gains taxes by purchasing a vacation home. Instead, you need to sell one income-producing property to buy another income-producing property with a value that matches or exceeds the property you’ve sold. 

In Albuquerque, this means that when you sell a property and earn $200,000 in profit, you have to use that $200,000 to buy another rental property.

There are also important deadlines to consider. If you’re going to do a 1031 Exchange, you have to identify the property or properties you want to buy within 45 days of closing on the property you sold. You also have to close on the new deal within 180 days of selling the original property. The entire transaction must be completed within those 180 days, otherwise you’ll be liable to pay the taxes that are due. 

It’s also important that you use an intermediary who will handle your trust account. You cannot touch any of the money that you earn from the sale of your initial property.

Investment Benefits to the 1031 Exchange

There are several benefits for Albuquerque investors who use the 1031 exchange. It allows you to dispose of a rental property that may not be performing the way you want without paying capital gains taxes. Other benefits include:

  • You can increase the number of assets in your portfolio. When you sell one property and make a lot of money, you can use the proceeds to buy two or three properties instead of just one. This provides you with additional rental income streams. 
  • You can save on maintenance costs. If a particular rental property has stopped cash flowing because of all the maintenance and repairs that have been necessary, you’ll be able to take it out of your portfolio and replace it with a newer property that has less expenses attached to it.
  • You can leave a more expensive market for the Albuquerque real estate market. Many investors who sell a property in California, for example, can get a lot more for their money here in New Mexico.

Contact PMThere have been recent proposals to limit the amount of taxes you’re able to defer, and we’re monitoring those things carefully. We love to help and empower investors to be more successful with their rental properties, so if you have any questions about how to improve and grow your portfolio with the 1031 exchange, please contact us at Bruni Karr Agency.