As an entrepreneur or real estate investor, you're always looking for ways to minimize your tax liability. A 1031 Exchange may be just what you're looking for. Named for the Internal Revenue Code section that governs them, 1031 Exchanges allow you to defer paying capital gains taxes on the sale of investment property by using the proceeds to purchase similar property.
Not all property qualifies for a 1031 Exchange. In order for the exchange to be valid, the property must be held for investment or business purposes. This means that your primary residence does not qualify. The property must also be exchanged for one that is "like-kind." This generally means that the new property must be in the United States and used for business or investment purposes.
Here's how a 1031 exchange works. Let's say you sell an investment property for $1 million. You can use the proceeds of that sale to purchase another investment property without having to pay capital gains taxes on the $1 million. You can even do what's known as a "delayed exchange," where you don't have to immediately purchase the new property. As long as you identify the new property within 45 days of selling the old one and close on it within 180 days, you can still take advantage of the 1031 Exchange.
There are a few other things to keep in mind if you're thinking about doing a 1031 Exchange. Most importantly, you must use a qualified intermediary to facilitate the exchange. And you must reinvest all of the proceeds from the sale into the new property, as you won't be able to keep some of the money and defer taxes at the same time. Finally, you must adhere to the time limits set forth by the IRS.
Despite these restrictions, 1031 Exchanges can be a powerful tool for real estate investors and entrepreneurs who are looking to defer paying taxes on the sale of investment property. When used correctly, they can help you grow your portfolio while minimizing your tax liability.
If you'd like to know if this tool makes sense for your specific situation, please contact us. Our Qualified Intermediaries would be happy to meet with you to discuss your needs and help you create a plan to accomplish your goals. To schedule an appointment, call (888) 508-1901.