Buying Property With 1031 Tax Free Exchange Explained
This BLOG On Buying Property With 1031 Tax Free Exchange Was UPDATED On December 3rd, 2018
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 sale of 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 tax free exchanges, they need to name the sale as a 1031 Tax Free 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 an 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 needs 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 purchase your new property
- Everyone should consult a 1031 tax free exchange professional such as an accountant or tax attorney prior
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