Every year more than $400 billion in Real Estate Sales is eligible to defer capital gains taxes through a 1031 Exchange. But nearly 50% fail to qualify due to lack of awareness.
Investors and businesses could benefit greatly from a 1031 exchange if only they knew it existed and how it worked.
What is a 1031 Tax Exchange?
It is a tax-free rollover of equity from the sale of a real estate property. Put another way, capital gains tax from the sale of a property is completely avoided by reinvesting the gain into a new qualified property.
For instance, John Doe sells his shopping center and realizes a capital gain of about $200,000. In order for John to avoid paying capital gains tax on the $200,000, he needs to quickly find a qualified property in which to rollover this gain.
The replacement property must cost at least $200,000 and be of “Like-Kind.” He finds a bigger and better shopping center, successfully completes the exchange and avoids paying tax on his gain.
One can completely avoid paying capital gains tax by reinvesting the equity/gain from the sale of one property to a replacement property. The result is a hefty tax savings and allows investors and businesses to pocket more profits by reinvesting real estate gains. Now the investor can refinance and get a cash pay out. Not a bad deal.
Some of the Specifics ….
Section 1031 of the IRS code says “No gain or loss shall be recognized on the exchange of property held for public use in a trade or business or for investment . . . ” The key words are “not recognized.” The capital gain is not recognized, thereby creating the tax advantage.
Basic Rules of a 1031 Exchange
1. The property in question must be for investment or business purposes.
2. Replacement property must be identified in 45 days from the day of closing on the sold property.
3. The new property must be purchased and the exchange complete within 180 days.
4. The replacement property must be a “Like-Kind”
5. Personal Property is not eligible
6. The replacement property must be identified in writing.
Anyone interested in the 1031 exchange will need the help of a third party. Search for Real Estate specialists that deal strictly with 1031 Exchanges. This will ensure you get the right Pro for the job and evade paying taxes the legal way!