Selling a piece of real estate you own for investment purposes can be a strategic move to protect or further build your wealth. This route is worth taking when you want to get rid of an underperforming asset, reap the benefits from land appreciation or diversify your portfolio. The usual downside of this decision is being liable to pay for capital gains tax on the proceeds of the sale.
Fortunately, seeking 1031 exchange services with the help of firms like 1031 Exchange Place will let you defer your tax obligation. For as long as you would use the money to buy a like-kind property, the Internal Revenue Service (IRS) wouldn’t come after you.
To ensure this measure won’t backfire on you, observe the following before pulling the trigger on this real estate swap.
You Have a Qualified Property to Sell
Make sure the property you’re planning to relinquish qualifies for a 1031 exchange. Not all types of real estate can be used to defer capital gains tax. Those used for personal enjoyment are generally not allowable.
But then again, many real estate properties that are not strictly used for investment may be utilized for 1031 exchanges. Timeshares and vacation houses make excellent examples. In some cases, the IRS may allow any of these properties to be used for a 1031 exchange for as long as you can prove that they were not used for personal enjoyment.
The operative word is prove. When using a questionable property for this measure, your argument and supporting evidence need to be solid to convince the government, or else your plan would fall apart.
You Know a Viable Replacement Property
The IRS has a rigid timetable when it comes to 1031 exchanges. You will need to identify a replacement property 45 days after relinquishing your asset. To defer the tax consequence of the relinquished property’s sale, the replacement one must be of equal or greater value.
Moreover, you don’t necessarily need to choose a replacement property that’s exactly like the one you have. If you have a rental condominium, you could buy a duplex or vacant land for as long as it would be used for investment.
You’re Positive You Can Close Soon Enough
After identifying a replacement property, you only have 180 days from the day that you sold your relinquished asset to close the deal. In other words, you just have 135 days from the end of the initial 45-period period. If you fail to meet the deadline, you would be liable for tax.
To preserve capital gains successfully, don’t execute a 1031 exchange unless you find a serious and committed seller first. Otherwise, you would be left in a tight spot if the other party decides to go with a different buyer or back out of the deal.
A 1031 exchange has to be well structured and thoughtfully planned. With the aid of an expert, you can navigate the rather tricky process of this tax-deferred measure, attain your investment goals and experience less stress.