When to Turn to the 1031 Exchange Tool
Investing in real estate is among the best ways one can make wealth. Just as you would find in any other investment, there will be risks and uncertainties. You have to accept the fact of certain taxes being present, such as capital gains tax and other tax rules. If you are not careful, you could lose a significant amount to these taxes. Luckily, there is the 1031 exchange. If applied within the rules and timeframe, you can save so much from the taxes. Here is more about how you can use this option to your advantage.
For the most part, real estate investments tend to give you more money than you spent while purchasing them. The profit you end up making in those scenarios is what is referred to as capital gains. The tax authorities are always ready to receive taxes from those proceeds, whatever asset you had to part with. The amount payable depends on the duration of your ownership of the asset, and your income tax bracket. The longer the ownership, the less you end up paying in capital gains taxes, as that is looked at as a long term investment. You can, however, avoid paying those taxes legally, as long as the money made is used to buy another property.
You get to make the most of the 1031 exchange if you meet certain expectations, and do the transactions in a given timeframe.
The property in which you put the proceeds from the initial sale must be like-kind. The rule here is conveniently vague, allowing you to use any kind of property. You only have to use one with a similar value, or one that has a higher value than the initial asset. You can also only do so with business or investment-specific properties.
You are also expected to find a replacement property in 45 calendar days’ time the moment you sell the first one. You then have 180 days from the time you sold the first one to have closed the next property. In case you see you will not meet those deadlines, you can file for a tax extension. You have to clear any other taxes you owe before the time is up. Failure to do so attracts penalties and interest.
Considering how complex the tool is, you need to allow professionals to handle it for you. They get to hold the money from the sale and do the paperwork. The moment you possess any money from the sale, you need to pay taxes on it.
Should you at some point decide to quit the real estate business, you can avoid paying the deferred capital gains tax. You can check out this site for more info on how, and these reasons why it is a good idea.