Information About 1031 Exchange Properties
When you’re selling investment property, a 1031 tax-deferred exchange can be a great way to avoid paying capital gains taxes. This procedure allows you to sell your investment property and reinvest the proceeds in another property or properties of like-kind – all while deferring capital gains taxes. Many investors use this strategy to increase their net worth.
In order to qualify for a 1031 exchange, you’ll need to follow some specific rules and guidelines set forth by the IRS. First, you must identify the property or properties that you wish to purchase within 45 days of selling your investment property. Second, you must close on the purchase of your new property or properties within 180 days of selling your investment property. The simplest way is to identify three properties during the 45-day Identification Period and then you can decide if you want to close on just one or two, or even all three properties to purchase.
There are many benefits to conducting a 1031 exchange, including deferring capital gains taxes and continuing to invest in commercial real estate. If you’re thinking about selling investment property, be sure to consult with a qualified tax advisor to see if a 1031 exchange is right for you. It is important that you use a qualified intermediary at the property closing and you never touch the funds that will be used for your new investment.
Say you own a commercial property that you’ve been using as an investment. You decide to sell the property and use the proceeds to purchase a new commercial property. Because you’re selling an investment property, you can take part in a 1031 exchange and defer paying any capital gains taxes on the sale. This is a tax deferment, not a tax forgiveness and you are required to pay the tax when you sell the second investment; but realize, you can continue to 1031 each time you sell an investment.
The phrase “like-kind property” is defined by the IRS as “property of the same nature or character, whether or not it is identical in grade or quality.” In other words, you can’t sell a commercial building and purchase a residential property with the proceeds unless the residential property is used as a rental as you could sell a commercial building and reinvest in another commercial building.
It’s important to remember that the definition of “like-kind” is specific and narrow, so you’ll need to be sure that the property you’re purchasing meets all IRS requirements. If you’re unsure whether a particular property qualifies as “like-kind,” it’s best to consult with a tax professional or a 1031investment. They can help you determine if a 1031 exchange is right for you and give you more information about the specific rules and regulations governing this type of transaction. There are several different ways of identifying properties during your 45-day Identification Period. To learn more about the more complex method you should consult a qualified intermediary.
One factor to consider when conducting a 1031 exchange is depreciation recapture. When you sell an investment property, any depreciation that has been taken on the property is subject to taxation at your marginal tax rate.
For example, let’s say you purchased a commercial property 10 years ago for $1 million. You were able to depreciate the property over those 10 years, taking a deduction of $100,000 each year. When you sell the property for $2 million, you will be taxed on the $1 million in capital gains, as well as the $1 million in depreciation recapture – which is taxed at your marginal tax rate.
What if you own an investment property with partners?
If you own an investment property with partners and you want to conduct a 1031 exchange, all the partners must agree to the exchange. In addition, all the partners must be qualified as unrelated investors – meaning that they cannot be related to each other by blood, marriage, or business. This 1031 exchange gets even more complicated if your investment in a corporation or LLC.
Conducting a 1031 exchange can be a great way to defer capital gains taxes on the sale of investment property. Be sure to consult with a qualified broker and tax advisor with experience in 1031 exchanges to ensure that you are following all of the rules and guidelines set forth by the IRS.
To find out more about 1031 Exchanges in Lubbock, Amarillo, and West Texas, contact
David Powell with The Powell Group.