Defer Capital Gains Taxes With A 1031 Exchange
So you are finally ready to sell your old investment or business property and invest in something new. But you definitely do not want to have to share your profits with the IRS, who is no doubt going to want to their cut.
There is a way to avoid that. Thanks to the US Internal Revenue Code’s, section 1031 laws – investors and business owners can indefinitely defer capital gains taxes on the exchange of properties similar to the one that is being sold. The 1031 tax exchange law sees no gain or loss if you sell your property used for investment or business, as long as the proceeds are used to reinvest in a another property like yours.
The Benefits of the 1031 Exchange Law:
A) The property owners are able to eliminate taxes they would otherwise have to pay from selling their property.
B) The deferral of capital gains taxes keeps the money working for the owner, by encouraging them to buy more investment property.
Section 1031 laws do NOT include: Bonds, Loans, Stocks Partnership Interest, Personal Residences, Certificates of Trust
…Section 1031 laws allow you to indefinitely defer capital gains taxes as long as you use the money from your sale to buy a similar investment property. Actually you can sell your investment property and use the proceeds you make to invest in another property that is like-kind.
Here are a few things you need to be sure of before conducting a 1031 Tax Exchange:
A) Compared to the price of your relinquished-property, the new property you are buying must be of equal or greater value.
B) The proceeds from the investment property you are relinquishing, absolutely must be used to buy the new property you want.
C) Then the replacement property you buy must be what is called, “like kind”. An example of this is when your old property is used as an investment property or in a business – then property you are replacing it with needs to be replaced with another like-kind property.
Once you’ve made the necessary arrangements, you may start the process of “exchanging” your investment property.
1. First you have to select some one who can do paper work and know about the 1031 tax deferred exchange.
2. You can sell your investment property to a buyer that wants to purchase, but be sure to let them know that you are using a tax exchange.
3. Within 45 days or less identify your replacement property.
4. Then it is necessary to claim your replacement property within 180 days.
Using a 1031 tax exchange can sometimes be a seemingly long process, but it’s definitely well worth it with the money you will save.
Filed under: Financial Advice