Having dealt with various investors (second home / vacation home clients), San Clemente Coastal Living thought it would be appropriate to address some 1031 Exchange basics.  First, as an investor, you must realize that in order to do a 1031 exchange it cannot be done on your principal residence.  Please note, however, you do not have to pay capital gains tax on a $250,000 gain if single or $500,000 gain if married on your principal residence based on IRS guidelines.  In order to successfully do 1031 exchanges, including into your eventual dream home, you need to understand the basics.

First, to qualify for a 1031 exchange, the San Clemente real estate that you plan to sell or purchase must meet four basic rules:

• Be exchanged with a like-kind property; in other words any other piece of real estate
• The replacement property must be identified within 45 days after the sale of the previous property
• The exchange transaction must be completed within 180 days
• The property must be used for productive purposes in a business or for investment purposes (cannot be your principal residence)

Beyond these basics, you should note that it's possible to do a 1031 exchange on a second home or vacation home.  In order to do so, you must own the property for at least two years, rent the property during each year for a minimum of 14 days at fair market value, and not use the property for your own personal use for more than 14 days.  If you have met these criteria for two years, now you can do a 1031 exchange into any other piece of real estate that qualifies.   

On the other hand, if you are an investor working towards your San Clemente dream home (i.e San Clemente ocean view home or condo), there are ways to do it through 1031 exchanges, however, pay special attention to the rules.  First, you must rent out your home for at least 14 days during the year and not use it for more than 14 days either.  At the end of the two years, you can now convert your San Clemente home into your principle residence.  In the meantime, if you have not taken any cash from your 1031 exchanges, you have deferred all tax on your gains (i.e. equity) to buy into your new home.  This beats taking money out of the stock market to purchase that home as it would be subject to capital gains tax.   Also, don't forget that when you sell your principle residence to get into this home, you don't have to pay tax on the first $250,000 gain if single or $500,000 if married.

If you are an investor that has done 1031 exchanges over the years and are ready to sell, don't forget that capital gains tax is still at 15% and there is a strong possibility that this will be raised in the near term to 20-25%.

For more information on 1031 exchanges or San Clemente real estate, including a second home and/or vacation rental, please contact us for a free consultation.