When you sell an investment property, you can use a 1031 exchange to avoid paying the capital gains tax. There are a few rules you need to follow, though.
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A 1031 exchange is named for the relevant section of the IRS tax code and allows you to defer paying capital gains tax by exchanging one investment property for another like-kind property.
For example, say you own a rental house and the value has appreciated since you purchased it. If you sell the property, you would have to pay capital gains tax on the profit. If you do a 1031 exchange to buy another investment property, you can roll over the profit into the next property and defer the capital gains tax.
In other words, you can invest the full proceeds of the sale into your new investment. When used correctly, the 1031 exchange is an excellent way to grow your capital and tax shelter.
You can keep rolling your capital into new like-kind properties as long as you follow a few simple rules:
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1. You must exchange your investment property for a like-kind property. When it comes to real estate, the definition of “like-kind” is fairly broad. You can exchange your rental property for raw land, an apartment building, or commercial office space so long as the property is located within the United States and will not serve as your primary residence.
You can continue rolling your capital into new like-kind properties.
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2. You have 45 days from the sale of the original property—also known as the relinquished property—to identify your replacement property. You have 180 days to close on the replacement property.
3. The replacement property must be of equal or greater value to the relinquished property in order to defer 100% of the tax.
4. Use a designated intermediary, also known as an independent third party, to facilitate the exchange. Obviously, there will be fees involved with this.
5. The 1031 exchange can only be used by the same taxpayer. The name on the title of the relinquished property must match the name on the title of the replacement property.
I can certainly connect you with professionals who are well-versed in 1031 exchanges. If you have any other questions, please don’t hesitate to give me a call or send me an email. I look forward to hearing from you!
