We all are aware of the growing COVID-19 crisis and its impact on the real estate sector. Any investor who has an asset would prefer to get rid of it and avoid uncertainty. But there is also a concern of getting slapped with a hefty capital gains tax bill given how much more the office building or business property is worth now compared to when they bought it years ago.
However, experienced real estate investors are aware of an inside option to defer capital gains taxes, and the great part is, it is perfectly legal! It is referred to as a like-kind or a 1031 exchange, as in Section 1031 of the Internal Revenue Service code.
If you’re a real estate investor or business owner contemplating selling a commercial property, it is a great rule to know.
What Is A 1031 Exchange?
The IRS code’s Section 1031 allows real estate investors to defer paying taxes on a property held either for business or investment purposes as long as another, “like-kind” property is acquired using the sale amount of the property.
1031 Exchange can reduce your overall tax burden.
You, as a property owner, can swap an existing investment property for like-kind property. Ideally, if you will sell an investment property, you will have to pay capital gains tax. Many a time, due to this concern, investors stick to old non-profitable properties. But if you are the owner of a rental property or any other property that gained in value from the original purchase price, you can make a lot of money using a 1031 exchange strategy. All you need to do is purchase another like-kind property. This will allow you to defer paying capital gains tax on the sale.
You will always have the option to cash out in the future and pay taxes. But in the meantime, you can upgrade to a better property without causing an immediate tax obligation. Keep in mind that in a 1031 exchange, both the purchase price and the new loan amount must be the same or higher on the replacement property.
These are the steps for a 1031 exchange:
- Trade an investment property;
- Qualified Intermediary will get your capital gains;
- Find a like-kind property within 45 days;
- negotiate with the seller of the like-kind property;
- agree on a sales price;
- Your Qualified Intermediary will wire the capital gains to the titleholder;
- Complete the IRS form.
What to Know More About 1031 Exchanges
- You cannot do a 1031 Exchange on personal property. Only business or investment properties qualify for this strategy.
- You can withdraw some cash from the sale amount if needed and pay tax on it. This money is called a boot.
- After the sale of the property, you get 45 days to identify a like-kind property. This is called an identification period.
- NNN Properties and DSTs are considered the best properties because they require no maintenance and provide a steady flow of income.
- You can repeat 1031 exchanges as many times you wish, and once you are gone, your heirs will obtain the property on a step-up basis.
If you are considering a 1031 Exchange or already in the identification period, we can help you make the process hassle-free. We have more than 15 years of experience assisting thousands of investors in completing a successful 1031 Exchange. Call us 888-993-2835 or email us to firstname.lastname@example.org get started!