So you are finally ready to sell your old investment or business property and invest in something new. But you really don’t want to have to share the money you have made with the taxman who is going to want to collect his cut.
There’s a way to prevent that from happening. Investors can thank the IRS for Section 1031 because it provides an out for real estate investors, property investors, and business owners by allowing them to defer their capitial gains taxes indefinitely by purchasing a property that’s similar to the one they are giving up. 1031 tax exchange laws do not recognize the need to pay capital gains taxes as long as you sell your property (used for investment, trade or business) and use the proceeds to reinvest in a another property or equal or greater value.
The Benefits of the 1031 Exchange Law:
A) Investors can save money by deferring their taxes on the sale of their property.
B) The elimination of taxes puts more money in the owner’s pockets and allows them to invest in more investment property.
What the 1031 tax exchange law does not include: Stocks, Bonds, Loans, Certificates of Trust, Partnership Interest, Personal Residences
…The good thing is that the 1031 Tax Exchange Law states that you don’t necessarily have to exchange or trade your property for an exact match, in order to avoid from having to pay taxes. You can actually sell your property and use the money you make to invest in, and buy, a property that is akin to your relinquished one.
In order to qualify for a 1031 Tax Exchange you must make sure of the following:
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 property you are buying has to be similar to your old one. For example if your old property was used for business then the one you are purchasing must be used for the same.
Once you’ve made the necessary arrangements, you may start the process of “exchanging” your investment property.
1. You must first choose a qualified intermediary to manage and facilitate your 1031 exchange for you.
2. Selling your investment property to a buyer that wants to buy it means you will also need to let them know that you are utilizing a 1031 exchange.
3. Within forty five days or less identify the replacement property.
4. It’s now required that you choose your replacement property within the allotted 180 days.
The 1031 tax exchange process may take some time, so be patient and rest assured you will benefit from it in the end.