US Virgin Islands 1031 Exchange
WHAT IS A 1031 EXCHANGE?
A 1031 Exchange, also known as a Like-Kind Exchange or Starker Exchange, enables investors to defer tax liability from the sale of a business or investment property in order to reinvest in a second property of a like-kind.
The term refers to Internal Revenue Code Section 1031 concerning the exchange of investment property for a like-kind property. 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.”
HOW A 1031 EXCHANGE WORKS
Upon selling an investment property for a profit, all sellers are required to pay a capital gains tax at either a short-term or long-term capital gains rate. However, if you intend to use these profits to reinvest in a like-kind property of equal or greater value, you may be eligible to defer the tax liability. Deferring liability may help investors increase potential income by moving to more profitable real estate markets or superior facilities.
Other benefits of 1031 exchanges include property consolidation or market diversification. In the first case, landlords may decide they want to consolidate multiple investment properties into a single property in order to simplify their property management practice.
Conversely, 1031 exchanges may also help property managers to diversify their markets by converting one investment property into multiple properties across various locations while deferring tax liability. Additionally, investors may choose to diversify the type of property they own; for example, they may relinquish a single family home in exchange for a parcel of land, condominiums, or commercial space.
After the tax liability has been deferred, the investor will be required to pay taxes upon sale of the second like-kind property. However, if another 1031 exchange is executed, the liability may be deferred yet again, if deemed eligible.
QUALIFICATIONS FOR A 1031 EXCHANGE
Generally, any real estate primarily held for investment or held for productive use in a business may be eligible for a 1031 exchange. A personal residence will not qualify for the exchange, but a vacation home used predominantly or entirely as a rental property will most likely qualify.
Additionally, the property purchased with the proceeds from the sale must be of like-kind to the property being sold. The like-kind property to be purchased must be identified within 45 days and the purchase must be completed within 180 days after the sale of the original property.
Section 1031 necessitates the use of a Qualified Intermediary who will ensure that all eligibility requirements are adhered to. For example, the investor and agent must not have access to funds from the sale during the period of exchange: this would be considered a sale and would preclude the investor from executing the tax deferral. Instead, a third party Qualified Intermediary will hold the funds in an interest bearing account for the taxpayer until the exchange is complete. They will also assist with the preparation of exchange agreements, 1099 forms, and related statements.
Additional stipulations exist, including limitations on the amount of capital gain that may be tax deferred. Always consult a tax advisor before making arrangements for a 1031 exchange.
ARE THE US VIRGIN ISLANDS 1031 ELIGIBLE?
Yes – Section 1031 does apply to businesses and investment properties in the US Virgin Islands. Section 932(a)(3) generally provides that the U.S. shall be treated as including the Virgin Islands. Contact a Holiday Homes agent below for information on how we can support your 1031 exchange in the US Virgin Islands!
WHY NOW IS THE TIME TO INVEST IN THE US VIRGIN ISLANDS
Given recent world circumstances, an exceptional demand has risen throughout the US for short-term and long-term home rentals in warm weather locations. People want to venture outdoors — and if there’s one thing we love about the Virgin Islands – it’s the year round gorgeous weather.
Between remote work opportunities and social distancing guidelines, luxury media outlet DuJour describes villa rentals as “the most desirable travel amenity right now” with the Caribbean “at the top of the list.” And from an investment perspective, the US Virgin Islands offer benefits that other islands simply can’t. First, the USVI is protected by US laws, banking system, and Constitution. This includes benefits like the 1031 exchange and EDC tax incentives that may appeal to your renters.
But USVI rental properties are also an incredibly promising long term investment. As it was, rental real estate in St. Thomas, St. Croix, and St. John had a high occupancy rate over the past several years. A surge in visitors to the US Virgin Islands in past years outpaced hotel capacity on the island, guiding users to rental properties. The demand for USVI rental properties has been so dramatic that in 2018, Airbnb named St Thomas its top Caribbean destination, taking the 6th spot in Spring bookings with a year-over-year growth of 600%. The following year, growth held strong, St Thomas again taking the 6th spot in Airbnb bookings with year-over-year growth at 338%.
Learn more about why the US Virgin Islands is the perfect place to invest in a rental property and find property managers to help you realize your dream.