Why Use Turnkey Rentals For Your 1031 Exchanges?

August 20th, 2019

Turnkey rentals are ideal for the real estate investor who does 1031 exchanges. If you’re a new or seasoned investor and you want to take advantage of Section 1031 of the Internal Revenue Code to defer capital gains tax, there’s no easier way than to team up with a turnkey rental company for all of your investment properties.


What Are The Basic Rules of the 1031 Exchange?


In order to qualify for the 1031 exchange, the investor must comply with a basic set of rules and guidelines. Some of them are straightforward while others are more ambiguous. Here they are in a nutshell:


Property Must Be Like-Kind


As the IRS states, “Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate.” The IRS like-kind tips site goes on to say, “Real properties generally are of like-kind, regardless of whether they’re improved or unimproved.” For example, almost any type of investment property could be like-kind to a turnkey rental property.


Property Cannot Be Investor’s Residence


This includes the primary residence and vacation homes and second homes. You can rent out the investment property to a family member or friend at fair market value if you want, but you can’t live in it yourself for any length of time.


Property Must Be For Investment Purposes


This means no fix and flips. Most tax experts recommend holding the property for a minimum of a year to demonstrate investment intent. Nothing in Section 1033 specifies a year minimum, but it’s a rule of thumb most CPAs and smart investors are tending to follow. If you use turnkey rentals for your 1031 exchanges, your investment intent isn’t likely to be questioned at all, since the property will be cash flowing from day one.


Use of an Intermediary


This is one of the ambiguous guidelines. You don’t absolutely have to use an intermediary. However, you aren’t allowed to use or profit from the money between the sale and purchase. The best way to ensure you keep your hands clean, so to speak, is to use a qualified intermediary who can control and safeguard the funds.


Titles Must All Be in the Same Name


If you purchase a property under your own name, all the 1031 exchanges you do in the future pertaining to that property must be in the exact same name. So if you want to form an LLC for investment purposes, you should do it before you buy your first investment property. Note that you can take advantage of the 1031 exchange as an individual or a business entity-the IRS allows all tax paying entities the same 1031 exchange benefit.


Identify Property to Buy Within 45 Days


Here’s one of the strict rules of the 1031 exchange. When you sell a property you have just 45 days to identify a new property that you’re going to purchase. As a real estate investor, you know how hard it can be to find a cash flowing investment property. It’s challenging enough to do it when there’s no pressure, but not you’ve got the IRS breathing down your neck to hurry up and formally identify the next property.


This is one reason why it’s advantageous to use turnkey rentals for your 1031 exchanges. When you choose to work with a turnkey rental company such as MartelTurnkey, you have online access to an inventory of eligible turnkey rentals that are already cash flowing. It’s like having a catalog of turnkey rental properties at your fingertips. You could literally choose one in a day. 45 days would be more than enough time to identify a turnkey rental property.


Yet another aspect of 1031 exchange rules is that you aren’t limited to identifying one property. You’re allowed to identify up to three turnkey rental properties. You don’t have to buy two or three, but if you are ready to move up to the next investment level, MartelTurnkey periodically has two house deals and three house deals. This makes it incredibly convenient to advance your real estate portfolio in one fell swoop.


Close on New Property Within 180 Days


The last major rule you have to follow in order to claim your 1031 exchange capital gains tax exemption is that you must receive the new property within 180 days after closing on the exchanged property. Your CPA can help you work out the exact dates and deadlines; just be aware that those are actual days, not business days.


When you work with a turnkey rental company like MartelTurnkey, you won’t have any trouble complying with the 180-day rule. We already own all of our turnkey rentals for sale so you’re not dealing with an unknown seller that may delay or complicate the sale. Each of our turkey rentals for sale have property management in place and paying tenants. All you have to do is take over and enjoy the cash flow.

Turnkey rentals make good sense when you’re taking advantage of the 1031 exchange rules. If you’d like help choosing a turnkey rental property or you have questions, please feel free to contact us.


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