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.
A 1031 exchange is a way for real estate investors to delay paying taxes on the profits from selling a property. They have to buy a similar property with the money they made from selling the first. Both the sold property and the bought one have to be for business or investing purposes. They also have to be "like-kind," meaning they're similar in some way even if not perfectly the same.
Unsurprisingly, there are many 1031 exchange rules to prevent abuse. You should understand these five rules.
The sale and purchase have to occur at the same timeframe or be part of the same transaction. Also, the investor must tell the government about the new property within 45 days and complete the sale within 135 days after the initial 45-day notification. The 1031 exchange requirements come out to a 180-day timeframe.
Every 1031 exchange requires two parties. Each party must be a real estate investor or commercial property owner.
The properties must be like-kind. 1031 exchange rules have a fairly broad interpretation of what like-kind means. For example, you should be able to exchange a residential rental property for a commercial building.
A professional called a qualified intermediary helps with the exchange. Their job is to hold onto the money until you use it to buy the replacement property. While this looks a bit like escrow, it's not legally the same. Particularly, the intermediary handles the paperwork and will file documents with the government on behalf of the two parties. Escrows rarely do this work.
Your goal is to defer the capital gains tax obligations from the sale of the first property. The taxes on the old property are not gone but are delayed until you sell the new property.
Notably, this is only as long as you follow the 1031 exchange rules. If there is a mistake, you could accelerate the tax bill for the first property while still being on the hook for buying the second one. This is why everyone who performs a 1031 exchange uses a qualified intermediary to get it right.
Notably, a 1031 exchange only defers the capital gains from the sale. The gain is the taxable portion of the profit between buying and selling the first property. If there are other applicable taxes at either location, such as school or property taxes, those will come due as always. For more information on 1031 exchange requirements, contact a professional near you.Share
5 January 2023