Let’s run through an all too common scenario with real estate investors in the past…
You have a rental property worth $200,000, but you would like to sell it and buy a different one worth slightly more. The property will be used in the same manner as its predecessor. Usually, you would incur a tax liability from the net proceeds, leaving you with less capital for your intended investment.
That was until the introduction of the 1031 Tax Deferred Exchange that allows a real estate investor to defer capital gains tax liability, effectively releasing more money to you for investment. A full deferral means that you will invest the entire net proceeds in the exchange property, effectively dictating that the replacement be of equal value or worth more than the original.
Let us explain further —
What Does This Exchange Mean?
Section 1031 of Internal Revenue Service Code allows you as a real estate investor to defer your tax liability when you dispose of one property and invest in another of the same nature. The said property must be the used for trade to generate income.
What Are The Conditions For A 1031 Exchange?
The law states that the exchange property should be like-kind, meaning it should resemble the sale property in nature and character rather than quality. You can spread the net proceeds over one or more exchange properties.
Like-kind property considered in the deferral plan include:
A real estate investor must adhere to strict deadlines if they are to benefit from this tax deferral plan. You should identify an exchange property within 45 calendar days of closing on of the sale property. After determining the replacement property, you should close the deal within 180 calendar days of closing the previous investment.
Practically, say you sold your property on January 1, 2017. The identification period ends on February 15, 2017, while the exchange period ends on June 30, 2017. If you fail to close the deal within that time limit, you lose your deferral privilege.
We are an experienced Durham property management company that would like to see you take advantage of this tax deferral. Talk with Barker Realty today for more information on 1031 Exchanges and managing your rental properties with ease!
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