Many investors who sell investment properties believe that the federal capital gains from such sales must be transferred to the IRS. However, this is not always true. IRS Code Section 1031 allows investors to reinvest federal capital gains resulting from a sale if they swap the property for another. It doesn’t always have to be for like property’. You can make that money work for yourself, rather than letting the IRS take it. You don’t have to sell the same property twice! According to the 1031 Code, no gains or losses can be recognized when any type of investment property or business use is exchanged for another business use.
What does all this mean? What does this mean?
A 1031 exchange is a good option if you have a business or investment property. The federal and state capital gains taxes can be deferred 100%. 1031 Exchanges are basically interest-free loans. The principal can increase through future trades, which allows the exchanger not to pay back the principal. This can be a very profitable venture if you have a good realtor to guide you.
Are you worried about the 1031 Exchanges. These are some facts that will help you make a decision.
Previously, an exchange was only for the purpose of swapping investment properties with the same person. But this is no longer the case. You can actually sell your property to someone without a relationship to the person who is purchasing the replacement property. It is important to remember that similar properties once existed, condo for condo and empty lot for empty lot. However, this is no longer true. You can exchange your empty lot for an apartment building if you have already invested money. This is also possible if you follow the 1031 exchange guidelines. The owner of an empty lot can sell one lot, then buy several other lots or simply purchase one and sell the rest. Please note that 1031 Exchanges are only available for Investment Properties, not residences.
A 1031 Exchange is not available to large investors who own commercial property. A 1031 Exchange has the best feature that it can be used for all investment properties, no matter how small or large. 1031 Exchange is the same for a company selling a large shopping center as it is for an individual selling a single-family home used for rental or investment in a resort. Many people believe that 1031 Exchanges can be very complex and are not worth looking into. A qualified Realtor(r), who can give you professional advice, is a good choice. 1031 Exchanges are a smooth process, and it is worth looking into. However, sound advice from an experienced realtor(r) is key to your success.
An Exchanger can purchase a property that has greater potential for income. Raw land, for example, can be sold to purchase income-producing property. You can exchange a duplex rental property for a 4-family investment property that offers more income. The 1031 Exchange is a great way to improve your cash flow and exchange your investment or rental property. It also allows you to acquire more investment property.
What is the Work of it?
Section 1031 tax deferral permits an investor to sell a property and then reinvest the proceeds into a new property. This allows them to defer capital gains taxes. The exchange must be “like-kind” within 45 days after the sale closes. The following is an example of how this exchange works: An investor who has made a $200,000 capital gain but is subject to $70,000 combined taxes upon the sale of the property, $130,000 can be used to reinvest in other properties. The seller could only purchase a property worth $520,000 if the investor paid a 25% down payment and had a 75% loan-to-value ratio.
The entire $200,000 equity of a 1031 exchange could be reinvested into a $800,000. This exchange provides powerful protection against capital gains taxes for investors. To reap the benefits of the exchange’s 1031 status and its workings, it is important to understand what it means. Not all real estate is eligible for the exchange. Only investment property and business property will be eligible for tax deferral.
The property sold and the property received must be “like-kind”. This is often misunderstood to refer to the same types of properties. Real Estate Property has a broad like-kind provision. It includes land, rental property, and business property. You can mix and match type in a 1031 exchange. You could exchange land for a duplex or a commercial building to open a retail shop. Personal property has a more restrictive like-kind provision. Finding a new investment property within the 45-day limit is one of the most difficult aspects of a 1031 exchange. The IRS is strict about following the restriction and rarely allows extensions. The next step is to obtain the additional capital required for the exchange once a replacement property has been identified. There is an easy solution to this problem. A bridge loan can be a quick and efficient way for commercial lenders to finance a property. Bridge loans are typically offered for 12–36 months. This is the same time frame that a property owner would require to exchange for a 1031.
DISCLAIMER — I am not an accountant or a lawyer. This information is not intended to be considered legal advice. It was compiled from secondary research and other public information. To get the best advice, you should consult your legal and/or accountant professional.