Some real estate investors are able to hold on to their proceeds from the sale of an investment and agree to pay the tax later, through the implementation of a 1031 Exchange. This is a great way to save for the future!
A 1031 exchange enables an investor to defer the taxes due from the sale of an income producing property into the new or replacement property. This is a great investment option because it provides more money to be reinvested.
There are some rules and strict deadlines.
Personal use real estate like a primary and second home can not be used in an exchange. The property to be exchanged must be like-kind or real estate for real estate. Rental property can be exchanged for other rental or investment property.
Timing deadlines are iron clad, the investor must identify the replacement property within 45 days of the sale of the sold or relinquished property. The new or replacement property must be closed within 180 days of the sale of the sold property.
The replacement property must be of equal or greater value, equity and debt than the one being relinquished (Sold).
All net proceeds must be used in acquiring the replacement property. No money can be received by the seller out of the exchange.
A tax deferred exchange may sound difficult, and there are rules, but it is relatively easy. You will need to consult your tax person, work with a professional real estate person, and a company called a qualified intermediary. It is important that the owner of the property be hands off in the transaction for it to be valid. There are also strict rules on who can purchase the relinquished property, as in not a relative.
Additional information can be found in IRS Publication 544.
Need more info? Call me Georgia Weaver, 712-291-0118 - this is one of the best wealth building tools available.