If you’re looking at doing a 1031 exchange to grow your wealth in Sedona, you probably know the basics: you’ve got 45 days to identify a replacement property and 180 days to close the deal. But most people don’t realize there’s a lot more to 1031 exchanges that can save you money and open up opportunities, especially in a high-value market like Sedona. Here are my top seven surprising facts, including how you can use 1031 funds to finance your earnest money deposits, to help you make the most of your investment.
1. You Can Use 1031 Funds as Earnest Money
This is a big one: you don’t have to dig into your own pocket for the earnest money deposit when buying a Sedona property. With a 1031 exchange, you can make a request from your qualified intermediary to send those funds straight to the title company. In Sedona, where median home prices top $1 million, earnest money deposits often run $10,000 to $30,000 or more. If you’re asset-rich but cash-poor, this trick is a lifesaver. No need to scramble for cash when your offer gets accepted. Just keep in mind you typically only have 72 hours to get the earnest money to the title company once the offer is accepted so make sure you jump on this as quickly as possible to avoid getting “cured” and losing the property.
2. You Can Exchange for Multiple Properties
Most people think a 1031 exchange is just a one-for-one. Think again. You can spread the proceeds from your relinquished property across multiple replacement properties. This is perfect for diversifying in Sedona’s booming market. For example, if you sell a $2 million commercial property in California, you can buy a $1 million short-term rental (STR) and a $1 million long-term rental (LTR). It’s a smart way to mix things up while keeping your taxes deferred.
3. You Can’t Use 1031 Funds for Personal Property
1031 exchange funds are strictly for real property. Think of land or buildings. You can’t use them to buy personal items like furniture for your new Sedona Airbnb. So, if you’re getting ready to set up a furnished rental, plan on covering furnishings separately. Pro tip: Check out local Sedona artisans or secondhand shops for unique, budget-friendly pieces to deck out your rental. Need help with this? Reach out and let us know. We’ve helped our clients furnish nearly a hundred furnished rentals.
4. You Can Include Improvements in the Exchange
Got your eye on a fixer-upper? You can use 1031 exchange funds to cover improvements, but the tricky part is “as long as they’re done within the 180-day exchange window”. This is a great way to boost your property’s value. Imagine buying a property for $800,000 and using $200,000 of your exchange funds to renovate it into a high-ROI STR. Just make sure the improvements are tied directly to the property and you work with a trusted contractor that can definitely get the job done in time. Need help finding a trusted contractor as well? We got you. When you work with our team we will introduce you to our most trusted contractors to ensure the job gets done right the first time, on time.
5. Vacation Homes Can Qualify (With Some Rules)
Dreaming of a Sedona vacation home that doubles as an investment? A 1031 exchange can work if the property is primarily for investment. If you rent it out for at least 14 days a year while keeping personal use under 14 days. Sedona’s tourism market, with 80% STR occupancy rates, makes this a solid play. But don’t skip the fine print; talk to a trusted tax advisor to nail down IRS compliance.
6. Delaware Statutory Trusts (DSTs) Are an Option
If you want a completely hands-off investment, check out Delaware Statutory Trusts (DSTs) that operate in Arizona. You can use your 1031 funds to buy a fractional interest in a larger luxury property in Sedona. It’s perfect for passive investors who want a slice of Sedona’s rental market without the hassle of managing it. Think of it as owning a piece of the pie while someone else handles the details.
7. You Can’t Touch the Funds
One last thing to know: once you sell your relinquished property, those 1031 funds are off-limits for anything but the exchange. They’re held by a qualified intermediary, and you can’t use them for personal expenses or non-exchange costs. Touching the funds triggers a taxable event, wiping out your tax-deferred benefits. Keep those dollars earmarked for your next Sedona investment, not for paying off credit cards.
Why This Matters for Sedona
Sedona’s real estate market is a goldmine, with median home prices over $1 million and crazy demand for STRs and LTRs. A 1031 exchange lets you grow your portfolio tax-deferred, and these lesser-known tricks, like using funds for earnest money or improvements, give you more flexibility to jump on opportunities in our unique market.
Ready to Make Your Move?
A 1031 exchange can be a game-changer for your Sedona investment, but it’s not something to tackle solo. As a local 1031 expert, I’ve guided tons of investors through the process, from identifying properties within 45 days to closing the deal. Let’s chat about how these strategies can work for you. Schedule a free consultation with me at OwnInSedona.com, and let’s make your tax-deferred dream a reality.
