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1031 Exchange

1031 Exchange, Like-Kind Exchange, and Starker Exchange — these are all terms that are buzzing off investors lips lately, and for good reason. The US Virgin Islands are now eligible to partake in 1031 tax-deferred property exchanges. So what could this mean for you? If you own investment or rental property, a 1031 exchange could enable you to defer tax liability from the property’s sale if the funds are used to reinvest in a second property of a “like-kind.” That is to say, you could use the 1031 exchange to seize on investment opportunities in the US Virgin Islands.

Benefits of a 1031 Exchange

When you sell your investment property, you will be required to pay a capital gains tax on your profits at either a short-term or long-term capital gains rate. But, if you instead reinvest profits from the sale in a like-kind property of the same or greater value, Internal Revenue Code Section 1031 provides for you to defer the tax liability. This opens up a world of possibilities for investors looking to diversify or move markets entirely — including stateside investors seeking opportunities in the the US Virgin Islands. Other advantages to a tax-deferred exchange include:

  • The potential to increase investment income by moving to more profitable real estate markets.
  • Property consolidation for those seeking to consolidate multiple investment properties into a single property.
  • Market diversification for those seeking to convert one investment property into multiple properties across various locations.
  • Exchanging one type of investment property for another kind of investment property (i.e. land in exchange for a single-family home)
  • Note that the investor will be required to pay taxes upon sale of the second property. However, if another 1031 exchange is executed, the liability may potentially be deferred again.

1031 Basic Qualifications

Internal Revenue Code Section 1031(a)(1) states: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment.” This indicates any real estate primarily held for investment or held for productive use in a business may be eligible for a 1031 exchange with these basic qualifications:

  • The new investment property must be of “like-kind” to the property being sold.
  • A personal residence will not qualify for the exchange, but a vacation home used predominantly as a rental property could qualify.
  • The like-kind property to be purchased must be identified within 45 days; the purchase must be completed within 180 days after the sale of the original property.
  • A Qualified Intermediary must ensure that all eligibility requirements are adhered to. For instance, the investor must not have access to funds from the sale during the period of exchange, so a third-party Qualified Intermediary will hold the funds in an interest bearing account.
  • There are limitations on the amount of capital gain that may be tax deferred. Consult an advisor for more information on this and additional stipulations.

Of course, always consult a tax advisor before making arrangements for a 1031 exchange.

The USVI is considered a US Property for a 1031 exchange – meaning investment properties on the islands are eligible. Learn why the US Virgin Islands is a great place to invest – and why now is the time to do it. Ready to find the perfect investment property? Contact a Blue Sky Real Estate agent today!

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