Many people who sell an investment property believe that federal capital gains from that sale must always be handed over to the IRS. This is not always the case.
What Does This Mean?
IRS Code Section 1031 indicates that no gains or losses will be recognized on the exchange of any type of business use or investment property for any other business use or investment property. This essentially offers investors the opportunity to reinvest federal capital gains from a sale if you swap that property for another. you do not have to sell your property for the same type of property either! Instead, as an investor, you could have that money work for you rather than end up in the hands of the IRS.
If you own a business or an investment property you should consider a 1031 Exchange. You would be able to defer 100% of both federal and state capital gains tax. 1031 Exchanges, in essence, become interest free loans. This is where the principal may increase through future exchanges allowing the Exchanger to never pay back, if the transactions are planned well.
Helpful 1031 Facts For You
1) You can sell your property to someone who does not have a relationship to the person from whom they are purchasing the replacement property.
2) Like-properties once meant the same property type for both parties. Such as, condo for condo, empty lot for empty lot but that is also no longer the case. If you have invested your money in an empty lot but wish to exchange for an apartment building, this too is possible and again, no taxes would be paid for the sale of the vacant land when following the guidelines of the 1031 exchange. 1031 Exchanges only apply to investment properties and not residences.
3) Many believe only investors of large commercial properties can utilize a 1031. One of the greatest features about a 1031 Exchange is that it applies to all investment properties, large and very small. 1031 Exchange works the same way for a corporation selling a large shopping mall as it would for an individual selling a single-family property used for rental or held for investment in a resort area.
4) Listen to your realtor! Many believe 1031 Exchanges are very complicated and not worth investigating. Consider working with a qualified realtor who can offer you professional advice and direction. 1031 Exchanges is a relatively smooth process and worth considering but sound advice from an experienced realtor is the key to profitability.
Should you wish to increase your buying flow due to greater cash flow, exchange investment or rental property for that with a greater income, acquire investment property that is easier to finance, or you have need to relocate or the desire to increase your current business space for a larger area, the 1031 Exchange can accomplish any or all of these goals.
Because a realtor is generally not licensed nor qualified to provide legal and/or tax advice, the above statements should be verified with your competent tax and/or legal advisor who has specific information about your particular situation. You should only rely on your competent tax and/or legal advisor’s advice and then proceed with your understanding with your realtor beside you.