If you are new to real estate investment you’ve probably heard a lot of terms thrown around for ways to make money and save money on your taxes. Let’s take a moment to answer the question, “what is at 1031 exchange.”By taking the time to understand this concept you’ll get an idea of what is available in terms of deferring your tax on the sale of a rental property so that you can increase your profit and continue to expand your portfolio of properties.
To start with you should know that 1031 is the section of the Internal Revenue Code that details how certain types of property can have their capital gains or losses deferred when a sale takes place. So basically you will be looking at the tax code that allows you to keep more of the profit from the sale of your property as long as you take that profit and roll it over into your new investment. Keep in mind that there are plenty of rules associated with this transition, and this is not an entirely tax free exchange. It is simply a way to defer your taxes to a later period, so when you do go to selling your final property you will pay the cumulative capital gains taxes that have accrued over time.
Now you have an idea of what 1031 exchanges are, it’s important to look at a few of the major details when it comes to completing this transaction. No matter what you want to make sure that you follow the rules explicitly so that a mistake does not result in you having to pay your taxes early. Also it’s important to understand that many types of investments are excluded from the section 1031 IRC. Stocks, bonds, and your own personal property are examples of assets cannot be used to complete a tax-deferred exchange.
The most common style of 1031 exchange deals with commercial and investment properties. This is real estate that is used by business or rental properties that are lived in by individuals other than your self. The sale of these kinds of properties within the correct time frame and following all of the IRC rules are what’s allowed to take place in this type of exchange. And the profit that would normally be associated and taxed as a capital gain must be used to purchase another similar property, which is why this process is referred to as a like kind exchange.
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