Identifying Tax Problems

When it comes to managing personal finances, it can be tricky to know how to proceed. While many people start focusing all of their energy on taking care of the things they need at the moment, the truth of the matter is that there are a lot of things you can do to disrupt your finances that may be easy to ignore at first. For starters, it is crucial to move forward and identify tax issues, even if you haven't focused on them quite yet. Check out these short posts to learn more about how you could be faced with tax problems, and how to resolve the situation for the long run.

Things Every Rental Property Investor Should Know About 1031 Tax Exchanges


As a rental property owner, you understand the importance of diversifying your income with multiple properties. You may have even been thinking about selling some of your existing properties to get a return on your investment while the market is pricing high. After all, selling your existing properties while the market is high gives you an opportunity to recognize a significant gain on your investment. With that gain comes capital gains tax. That is, of course, unless you opt for a 1031 tax exchange instead. Here's a look at some of the things you need to know about rental property 1031 tax exchanges before you decide if you're going to take advantage of the current real estate market.

1031 Tax Exchange Basics

For many who are new to buying and selling rental properties, a 1031 tax exchange is a somewhat foreign concept. Understanding what it is can help you to determine whether or not you should pursue it.

As with any real estate transaction, you're subject to capital gains tax on any gain realized from the sale of your rental property. If, however, you invest that money in its entirety into another rental property according to the terms of the exchange, you won't be held accountable for that tax.

1031 Tax Exchange Regulations

If you're considering taking advantage of a 1031 tax exchange when you sell your rental property, you need to understand the specifics of the process. You'll be required to find a new property to purchase within 45 days of signing the papers on the sale. Then, you'll have another four months to close on the sale and sign the final paperwork.

You'll also need to identify an intermediary to hold the proceeds from the initial property sale. That intermediary will then issue the check for the new purchase as well. This way, the money is never in your hands, which is another key component of claiming a 1031 tax exchange.

1031 Tax Exchange Considerations

If you're considering a 1031 tax exchange, there are a few key considerations that you do need to keep in mind. First, you can select as many as 3 properties for your initial identification process. Of those three properties, you can purchase all of them, two of them, or even just one of them, provided that you use all of the money that you received from the property sale.

That means that you could sell one property and invest in three of them if the collective value of the three of them is equal to the sale price of your initial property. 

Also, it's important to note that you can't use any of the funds for repairs. All of the money received from the initial property sale must be used in the purchase of the next property. Any repairs that the property may need will have to be paid for from other funds.

These are some of the things that you need to consider when you're thinking about selling a rental property and taking advantage of a 1031 tax exchange in the process.


28 September 2021