Steve Welty

Issue# 40

March 2025

Happy Saturday, Housing Heroes!

Heads up—if you’ve been curious about 1031 exchanges and how they might work for vacant properties, it’s time to tune in.

A 1031 exchange is one of the best tax breaks available exclusively to housing providers and investors. It lets you sell an investment property and buy another without having to pay capital gains tax right away.

What’s the Deal with Vacant Homes?

You might be wondering: Can a house that’s been empty for years qualify for a 1031 exchange? The answer is yes, but there’s a catch, the property must have been purchased as an investment. In other words, the IRS wants to see clear investment intent.

Why Should You Even Consider a 1031 Exchange?

A 1031 exchange is a powerful tool that lets you defer paying capital gains taxes on the profit from selling your investment property. This means you can reinvest that money into another property, keeping more of your capital working for you. In short, it offers the flexibility to upgrade your portfolio, expand your holdings, and build long-term wealth all while avoiding a hefty tax bill today.

Key Factors to Prove Investment Intent:

Intent at Acquisition: Did you buy the property to earn rental income or to sell for a profit later?
Holding Period: Keeping the property for two years or more strengthens your case.
Tax Records: Ensure the property is listed as an investment on your tax returns.
Marketing Efforts: Even if the home remained vacant, having rental or sale listings shows you intended to make money off it.
Insurance Classification: The property should be insured as an investment, not as a personal residence.

Why It Matters:

The IRS doesn’t require a property to generate income every month, it only cares about your original intent. Court cases have shown that if you can prove you meant to hold the property as an investment, even an empty house might qualify for a 1031 exchange. This could mean huge tax savings by deferring capital gains until you decide to sell the new property or eventually pass it on to your heirs.

My Take:

As a housing provider myself, I know firsthand the value of smart tax strategies. If you own a vacant property, make sure you’re keeping solid records, tax filings, insurance documents, and any rental or sale listings. This documentation can be key if you decide to pursue a 1031 exchange. With the right preparation, you could unlock significant tax savings and boost your investment returns.

Stay proactive, Housing Heroes, and keep this strategy in your back pocket as you plan for 2025 and beyond. If you have any questions or need further guidance, I’m always here to help.

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