* The following information has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should always consult your own tax, legal and accounting advisors before engaging in any transaction.
With real estate home prices surging across California over the last several years, many homeowners and investors are finding themselves sitting on considerable equity. Here on the Monterey Peninsula, luxury market areas including Pacific Grove, Carmel, Monterey and Pebble Beach have all seen dramatic growth in property appreciation, and now may be the perfect time to sell your property and get the highest price possible.
For those of you looking to buy or sell an investment or rental property in Monterey County, it may be possible to defer capital gains tax by using a “1031 tax-deferred exchange.”
Why should I sell my rental property in Monterey using a 1031 exchange?
There are a number of factors when deciding to sell a rental property in Monterey County using a 1031 exchange. You may wish to consolidate or diversify your portfolio, shift markets, or target increased cash flow and appreciation. An important benefit of using a 1031 exchange is increased buying power through leverage — rather than paying tax on the sale proceeds of your rental property, you can roll that cash over into acquiring a more expensive replacement property (or properties).
What should I consider if I want to buy a rental property in an area like Carmel or Pacific Grove?
The Monterey Peninsula is a trending market and very desirable place to live. Bolstered by highly rated school districts and a strong military community from the Defense Language Institute and Naval Post Graduate School, the Monterey Peninsula rental property market is highly competitive. Furthermore, we are seeing unprecedented recent appreciation in home values. Both of these factors make the Monterey Peninsula a desirable target for real estate investors. There are some great opportunities waiting for you; however, whether you are looking for a multi-family income property in Monterey or a single-family rental cottage in Pacific Grove, you won’t find everything online — a portion of our inventory is off-market. You can give me a call at 831-869-6117 to discuss your goals and I can provide you a list of off-market inventory.
Can I only perform a 1031 exchange near me? What kind of property qualifies, and how long do I have to complete the 1031 exchange?
Utilizing a 1031 exchange gives you many options — for example, you could sell a rental property in Pebble Beach, and buy two or even three rental properties in Monterey. But you aren't limited to a certain area. In fact, you can use a 1031 exchange with any kind of business or investment real estate, and you can buy and sell these exchange properties anywhere in the U.S. This means you can sell a vacant lot and buy a triplex, or sell apartments and buy a single-family rental property, regardless if they are in different cities or states. You can even do a partial 1031 exchange, deferring taxes on some of the sale proceeds, while taking the rest as income. Also, if done correctly, there is no limit to how frequently you can use a 1031 exchange to buy and sell these replacement properties. Of course, there are some IRS tax rules regarding 1031 exchanges, so you will always need to consult your CPA or tax advisor for any tax advice.
There are three basic types of real estate transactions involving a 1031 exchange in Monterey County:
1.) Delayed Exchange - This is the most common type of 1031 exchange, where you start by selling your investment property. Once you sell your investment property, you have 45 days from the date of the sale to name a replacement property. You then have an additional 135 days (a total of 180) to purchase and close on that replacement property.
2.) Reverse Exchange - This type of 1031 exchange is a bit more complicated. First, you go out and buy the investment property. Unlike a delayed exchange, you will need separate funds to purchase this second property (which makes this type of exchange less common). After you close escrow on this property, you “park" the title with an Exchange Accommodation Titleholder (EAT). You will then have 45 days to name a property you are relinquishing, and an additional 135 days (total of 180) to actually sell that relinquished property. At this point, the funds are used towards the first property and you can then take title.
3.) Simultaneous Exchange - This type of 1031 exchange is rare, although not complicated. You enter into a contract to sell one property, and another contract to buy the replacement property. All parties simply agree to close these two escrows on the same day in succession, usually back to back, to facilitate the 1031 exchange.
Where can I get help with a 1031 exchange in Monterey County?
Whether you plan to sell a rental property in Pacific Grove or buy an investment property in Carmel, you will want a local realtor that does a lot of business in this market and routinely facilitates transactions involving 1031 exchanges. I help clients buy and sell real estate using 1031 exchanges, and my trusted team — with Title Company, Escrow Officer and Certified Exchange Specialist as qualified intermediary — will ensure your transaction is seamless. I also partner with trusted vendors — including home inspectors, contractors and property managers — to support you with your investment purchase. I encourage you to call me today at 831-869-6117 so we can discuss your goals and get you the best results possible.
* As a reminder, the above article has been prepared for informational purposes only, and it is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should always consult your own tax, legal and accounting advisors before engaging in any transaction.