Warning: Creating default object from empty value in /home4/mldbm01/public_html/wp-content/themes/optimize/optimize/functions/admin-hooks.php on line 160

The best thing about selling a property is the great profit.  However, when you see how much Uncle Sam takes as taxes makes one shutter.  Selling an investment property is a big tax hit and I would like to discuss how to avoid this tax hit.  We all know taxes are a part of life but we always need to look at ways to reduce or even eliminate taxes legally. So let’s look at a legal “loophole” to doing so.  One of the best ways to avoid taxes when selling real estate is Section 1031 of the Internal Revenue Code. In a Section 1031 there are no taxes on the sale of a property by exchanging it for another. Knowing the basic 1031 rules as they apply to real estate can save you a lot of money.  So let’s go over the general guidelines to a 1031 exchange.

The first thing to be aware of is that to not have any taxes or a tax free exchange the purchase price of the newly acquired property must be equal to or greater than the sale price of your original property, and equal to or greater in debt.  All the proceeds from the sale of your first property must be used to purchase the exchange property.  Also, the real estate must be of like kind, meaning both properties must be investment properties. You can exchange a rental home for an apartment building, etc.  However, you cannot exchange personal residences. The property must be used for business, trade or investment.  In addition, although you now know the real estate exchange has to be of like kind, that does not mean it has to be of like quality. You can exchange an improved property for one that needs major rehab

Also, you can sell one property and buy several properties. Or you can sell several properties and buy one.  When doing these types of transactions, the cash from the first sale must go through a qualified intermediary and not directly to you or an agent working for you. If you do it incorrectly and handle the money you will end up paying the tax.  The good news is that you do not have to sell one property and buy the exchange property at the same time. You have 45 days from the closing of the first sale to identify up to 3 potential exchange properties and you have 180 days from the closing of the first sale to complete the entire transaction.

You can even exchange for a property that is under construction. But you have to value the unfinished property as it stands when you take title and it must be equal your gains from the first property.  Even a partnership can sell and exchange real estate as long as it takes title in the name of the partnership.  However, you cannot buy a property if you intend to do a quick flip of the exchange property, it will not qualify.  The 1031 has a lot of rules and we are not going to give you all the details here.  .

There is more than one advantage to the 1031 exchange.  Not paying tax isn’t the only advantage. In addition, exchanging real estate gives you greater buying power. Instead of using after-tax dollars, you’re using hundred percent of your money and not giving it to the taxman. So if you are ready to really boost your real estate holdings and get into bigger and better properties, the 1031 exchange is the best way to get there and it can get you there faster and tax-free. So really consider this for you and your family and plan proper and you will not ever have to pay taxes on your gains.  This will make you and your family and heirs very happy and wealthy.