The 1031 exchange may benefit some but is not intended for everyone. Homebuyers who want to buy a new home and sell homes while paying minimal if any capital gains tax may want to explore the 1031 requirements. Individuals planning to swap one property for another within the timeframe designated may be able to take advantage of the 1031 exchange.
What more could be done to grow an investment tax deferred? As long as eligibility requirements are met, buyers and investors can use a 1031 exchange multiple times, growing their investment tax deferred. Any investor may want to discuss a 1031 exchange with a trusted tax professional as tax laws change and individuals may experience complications due to their unique situation. Explore the 1031 exchange and learn more about this wealth-building strategy.
Understand the 1031 Tax-Deferred Exchange Fundamentals
Homebuyers may not know much about the 1031 exchange and how it may benefit them. This 1031 tax-deferred exchange makes it possible to defer tax consequences. It applies to the sale of an investment property. This is achieved through selling the original property and quickly investing proceeds in another property of similar or greater value. This does not mean that the owner will not ever pay capital gains tax but that they may hold onto it until a later period. They would have to pay capital gains tax when deciding to sell a property for cash or in other circumstances.
Average homeowners would not be able to qualify for a 1031 exchange. It applies to those involved in real estate investment of commercial, business, residential, mixed-use real estate and more. Investors appreciate the need to have a loss or gain on the exchange recognized with this process. Those who sell a property and purchase a like-kind property may be able to reinvest the profit when meeting all requirements.
Selling and buying like-kind properties is important in this game. The buyer who wants to benefit must find another property that will also be used for trade, investment or a business. The second property considered needs to qualify. For example, a duplex can be swapped for a commercial property and qualify for a 1031 exchange.
Be Ready to Move
There are strict guidelines for investors. With only a mere 45-day period granted in which to identify a similar property, investors have no time to lose after selling the original property. Once the second investment property is selected, another 135 days are allowed in which to make the purchase. Some choose to consider multiple properties for purchase before selling the original property. This helps them move quickly though the process of inspecting and closing on like-kind property.
Use of Equity and Debt
Investors who want to defer all of their capital gain taxes would do well to utilize all the equity and debt from the sale toward buying a property of the same or greater value. Do not expect to buy a property of lesser value and defer all the capital gains taxes. Investors will want to transfer the equity and debt from the original property to the new property to reap the full benefits.
It may not be possible to find a like-kind property of the same or greater value. A partial exchange or “boot” may then be possible. The investor would then have to pay capital gains on any difference arising from not using all the proceeds of an East Nashville new home sale. More debt or proceeds may be added with this exchange.
Go through a Qualified Intermediary
A homeowner would be able to sell a primary residence, buy a new home and receive cash directly. This does not happen under a 1031 exchange. Investors are obligated to work with a Qualified Intermediary (QI) to help with the swap of properties. Serving as an independent 3rd party, they will hold the sales proceeds and buy the second property. All this will be done for the investor.
Interested in a 1031 Exchange?
Situations may come up that can complicate the process. Laws can change and what was once permitted is no longer allowed, as in the case of using some types of personal property. In addition, investors with property that has depreciated may have to pay taxes on recaptured depreciation being viewed as ordinary income. Some may still be eligible to use the 1031 exchange toward the swapping of vacation homes.
New tax law changes can alter how the 1031 exchange is applied to selling and buying like-kind real estate. Some may not meet all the requirements of the 1031 exchange, making it useful to speak with a tax professional and learning more before initiating the sale of an investment property.
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