Selling a home that you purchased for a considerably lesser amount means you’re making money. That’s a great thing until Uncle Sam wants his share. While there are some tax exemptions on capital gains on a personal residence, there is another option – the 1031 Exchange, which is used by many real estate investors.
How to use a 1031 Exchange to acquire property in Boston could allow you to move gains from one property into another without paying taxes now.
Avoiding Capital Gains for Now
A 1031 Exchange is used for investment real estate transactions to avoid paying capital gains on the sale of the property. This is beneficial when you have seen a significant appreciation of the asset. The IRS actually looks at 1031 Exchanges beyond real estate property – in fact, all business assets are eligible for exchange, including horses! That being said, when one asset is being exchanged for another, both assets must be the same type of asset (also known as “like-kind”)
So while you can’t exchange a triple-decker condo building for a Kentucky Derby horse, you might try to exchange it for another investment multi-family building. And the 1031 Exchange only applies to business assets. Don’t worry about the residential unit if you lived in it for at least two of the previous five years prior to selling; you get a $250,000 capital gains exemption.
Interchangeable real estate properties used in 1031 Exchanges include rental single family homes, duplexes, condos, apartment buildings, and commercial property. Maximize your equity position by using the 1031 Exchange to take a full set of assets from one property to transfer into another without worrying about losing any money to taxes.
Types of 1031 Exchanges
There are four types of 1031 Exchanges:
- Simultaneous – when the sale and purchase happen on the same day. While it is possible for parties to “swap” deeds, most transactions use a third-party escrow company to facilitate the entire transaction to ensure all rules are followed.
- Delayed – more common where a seller relinquishes the first property and later purchases the new like-kind property.
- Reverse – buying one property first and then selling the relinquished property. This is only available to all cash buyers who don’t need to sale proceeds to get another property.
- Construction Exchanges – done when an investment property has been developed or significantly improved.
1031 Exchange Rules
- The 1031 Exchange needs to be a like-kind investment property.
- The transaction must benefit the same taxpayer, meaning it must stay in the same LLC or use the same Social Security Number.
- The new property must be of the same value or higher than the existing property.
- You have 45 days to identify a new property in a delayed exchange and 180 days to complete the new purchase transaction otherwise the exchange is void.
Make sure you are following the rules. If you are unsure of the process, find an escrow company that understands the 1031 Exchange process. They are pros at making sure you meet deadlines and follow all regulations. Don’t assume that you can just state the 1031 Exchange on the tax returns and be in compliance. Get the help you need at NextHome Titletown Real Estate.
If you are looking to cash out of one property and find a perfect new investment with solid upside potential, give our agents a call today or send us a message! We know this market better than anyone!
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