Buying Property With 1031 Tax-Free Exchange Explained
This article is about Buying Property With 1031 Tax-Free Exchange
Real estate investors who purchased investment property and decide to sell it, they will need to pay capital gains tax on the sale.
- Generally, real estate investors need to pay capital gains tax on the profit made from the sale of the property after expenses
- However, they may be able to defer paying taxes if they purchase another likewise or higher value property with a 1031 Tax-Free Exchange
- Real estate investors who reinvest proceeds from the sale and purchase another real estate property, they can defer paying capital gains tax on the sale of the property via a 1031 Tax-Free Exchange
- All of the proceeds from the sale of the real estate property cannot go to the real estate investor and needs to get rolled over to the new property purchase
- The new property purchase needs to be of similar value or higher value than the property that the real estate investor sold
Avoid Paying Capital Gains With 1031 Tax-Free Exchange
In order to avoid paying capital gains taxes via the 1031 exchanges, they need to name the sale as a 1031 Exchange prior to closing.
- Real Estate Investors cannot accept the proceeds from the sale of the real estate transaction and needs to be in an escrow account
- Again, they need to roll the proceeds from the sale of your property into the purchase of a like or more expensive property
- Investors normally have a time frame to pick the property or properties you have the interest to do the 1031 tax-free exchange
Investors will also have a certain time frame to close on the new property as well.
Proceed Of Sale Needs To Get Rolled To New Property Purchase On 1031 Tax-Free Exchanges
Remember that investors cannot accept or take out any part of proceeds from the sale of the property that is being sold.
- All the funds need to be in escrow at a title company or attorney’s escrow account in order for the 1031 tax-free exchange to be valid and for them to realize the tax benefits of not paying capital gains taxes
- Investors can sell and purchase a higher value property but will need to add additional funding required for the new purchase
1031 Tax-Free Exchanges Is For Investment Properties
1031 tax-free exchanges are for investment properties.
- It is not normally for residential owner-occupied properties
- When utilizing the 1031 tax-free exchanges, the investor must invest in a similar like property
- An investor cannot sell an investment property and buy a residential owner-occupied primary home
- Please do due diligence prior to doing a 1031 Tax-Free Exchange on a real estate transaction
- Remember that the proceeds of the sale cannot touch your hands and must be held in escrow until purchasing your new property
Everyone should consult a 1031 tax-free exchange professional such as an accountant or tax attorney prior.
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