Under The United States Internal Revenue Service Code Section 1031, certain real estate transactions are tax-deferred. You can defer paying capital gains tax on the sale of a property if the proceeds from the sale are re-invested in a like-kind replacement property within a specific timeframe.
An asset is considered "like-kind" if it is held to make a profit in a real estate/as an investment. When discussing investments, "like-kind" refers to the underlying asset's characteristics rather than its form. It's possible to trade one type of income property for another.
For instance, you can swap a single-family home for a duplex, a parcel of land for a department store, or a place of business for a residential building for equal or greater value, at fair market value; any permutation will do. The investor can adjust their portfolio to suit the demands of the exchanger better.
As experienced 1031 Exchange advisors, we work with our clients guiding them into from their prior sale.
.In most instances, it works in the following way: You would first determine which property you wish to sell and then choose a Qualified Intermediary to manage the transaction. Investors can anticipate paying up to 40% of the taxable gain in a conventional real estate deal.
Real Estate investors can now look for an alternative investment vehicle, diversify their holdings, grow their portfolio, or synchronize their investments to their long-term goals thanks to a 1031 exchange and its ability to delay paying capital gains taxes.
The income tax on the financial gains or the depreciation recapture you realized by following tax deferred exchanges is typically due whenever you sell the property if you employed depreciation to your advantage. You can defer these payments by continuing down a path, completing another 1031 exchange.
The 1031 replacement property exchanges aren't free, even though deferring capital gains and these taxes is a significant benefit. There are still several closing charges and other fees associated with the purchase and sale of a property. There is debate about which of them may be financed by exchange funds; however, many likely are. It's best to speak with tax experts to determine the fees and costs you might incur during a replacement property deal.
You can also use a 1031 exchange to reset the depreciation clock or purchase an asset with better cash flow. In essence, depreciation enables real estate investors to save on taxes as the personal property ages and depreciates. The benefit is gradually distributed over 27 1/2 years for residential rental units.
1031 tax exchanges come in various forms, including reverse, built-to-suit, and delayed exchanges. There are also other exchange options, such as drop-and-swap exchanges and tenancy-in-common exchanges. As experienced 1031 exchange advisors, we will explain their differences and unique features, helping you make sense of the technical jargon.
You can continue building your wealth through investment property using a 1031 exchange process to avoid paying short-term capital gains taxes. Based on this, due to the complex purchases, ensure you consult an experienced advisor and work with a Qualified Intermediary before moving forward. This can help you make well-informed choices and determine what is best for your long-term financial stability.
You can schedule a consultation with the Pivot Professional Partners’ team through this Contact Us form to plan your 1031 exchange. If you prefer to discuss your requirements regarding the exchange process over the phone, feel free to speak with our experts at (561) 444-3371.
While a 1031 is considered a tax strategy, we are not tax advisors, and you should consult your tax professional before investing.