Taxes are highly inconvenient, especially when it comes to lands and buildings. For example, if you want to sell a highly appreciated property, you have no choice but to pay capital gains tax. This financial liability is what discourages so many real estate investors from selling their assets. Nonetheless, it is possible to avoid paying the overwhelming capital gains tax bill. The IRC Section 1031 allows you to sell your possession and reinvest in a new one, while deferring capital gains tax. Only a real estate exchange will help you sell your property fast on the market. If you are seriously considering the section 1031 exchange, this guide will come in handy.
Understanding what a 1031 real estate exchange is
Saying that the 1031 exchange is a tax thing is not enough. What you should know is that the 1031 is commonly known as the like-kind transaction and it offers real estate investors the opportunity to purchase rental apartments or warehouses and sell them for huge profit. The great thing is that you get to acquire this kind of property with other people’s funds and the profit that you make are not taxable. The section 1031 of the Internal Revenue Code gives you the chance to defer taxes, make a lot more than you imagined and at the same time expand your real estate portfolio. However, you have to have a good understanding of how the process works.
Rules of the 1031 real estate exchange
If you want to take advantage of the 1031 exchange, you have to meet certain requirements. First of all, the property transacted must be used in a trade or business. To put it differently, you cannot use your personal residence in the transaction. 1031 is exclusively for business property and investment. What you can do, on the other hand, is transform your personal residence into an investment. Maybe then you have a chance. Secondly, the real estate must be swaped for a like-kind one, meaning an asset of the same type. The only issue is that like kind is not a precise notion. The rules actually give you permission to exchange a residential property for a shopping establishment. Finally yet importantly, you need to have an intermediary. A third party has to be used in the negotiations.
Completing a successful 1031 real estate exchange
If you have decided that you want to sell your real estate asset and do a 1031 exchange, you have to get an attorney and list your property for sale. It is important to stress that you have to make it clear to the buyer that you are planning to swap the asset for one of the same kind. Once you have found a buyer, you have to start looking for a replacement equity. You close the sale on your building for sale and afterwards you purchase the property with your acquired funds. The last thing you are required to do is file the 8824 form with the Internal Service Revenue.