With the booming property prices of recent years, more and more people are finding themselves facing a large tax bill when they come to sell their investment properties.
However, did you realize that there is a perfectly legal way of deferring payment of such taxes by utilizing the advantageous 1031 tax code that was introduced by the IRS in the early 1990s?
A 1031 exchange is a way of deferring payment of capital gains tax on certain types of real estate
Normally when an investment or business property is sold, capital gains tax has to be paid.
However, with 1031 exchanges, by replacing the old property with a like-kind property, within set time limits, payment of capital gains tax can be avoided.
Under the 1031 exchange real estate rules, a seller must have held a property for at least one year and a day for it to qualify.
Another requirement is that both old (relinquished) and new (replacement) 1031 exchange properties must be of a like-kind – either rental properties, vacant land, trade, business or investment properties.
1031 exchanges must be completed within strict time limits
There is a 45 day Identification Period from the transfer of the old property, in which a replacement property must be identified.
The 1031 exchange rules stipulate that the exchange must be completed within the 180 day Exchange Period.
The 1031 exchange real estate issues are complex, so it is imperative to seek professional advice from a tax advisor or qualified intermediary who can assess your specific circumstances and explain other issues such as the reverse 1031 exchange or TiC rules.
With careful financial planning, you can reinvest your capital gains in future real estate investments, thereby allowing you to leverage your money more efficiently and to reap greater financial benefits.