1031 Tax Free Exchange

Buying Property With 1031 Tax-Free Exchange Explained

Gustan Cho Associates are mortgage brokers licensed in 48 states

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

How to buy a property with a 1031 tax-free exchange explanation

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

What are the significance of investment property loans?

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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