Real estate is one of the five lucrative asset classes that investors should consider adding to their portfolio for liquidity, cash flow, and revenue. Similar to any other profitable investment avenue, real estate investors also need to pay taxes on income generating properties as well as their annual income. However, there are ways to avoid tax liabilities with 1031 Exchange being one of them. This is an IRS approved legal method that helps real estate investors defer taxes by selling a property and investing the equity in a second property that has equal or higher value. The investor gets a complete tax waiver till they sell the second property. The 1031 Exchange eventually results in an appraised value of the real estate investment and significant tax savings for the investor. If you have plans to invest in real estate, we unveil four facts about 1031 Exchange in the blog post that will help you make the investment more lucrative.
1. 1031 is for Business and Investment Property
1031 is applicable to investment and business properties, which means you can not sell your primary house to buy another home. There’s, however, a clause that you can use this legal way to swap vacation homes.
2. Provision of Delayed Exchange
A 1031 Exchange is simply a swap of one property with another with the intent of delaying taxes on capital gains of a given piece of real estate. Your chances of finding someone who has a suitable property you’d want to own and who also wants to own your property are quite bleak, however. To address the roadblock, the IRS has a provision of delayed exchange, wherein, a middleman holds the cash received from selling a property and buys a replacement property with the escrowed cash.
3. Closing Within Six Months
The owner has to close on a new property within 180 days of selling the old property. The deadline starts from the day a property is sold. For instance, if you designate a replacement property 40 days after the sale of your own property, there will be 140 days left to close the deal.
4. Cash is Taxable
If an individual has cash left over once he/she acquires the replacement property, the taxable amount must be paid at the end of 180 days. The cash is considered as capital gain from the sale of the property and is taxable.
Despite having investor regulations, property regulations and deadlines, the 1031 Exchange is a lucrative avenue for property owners who are looking to sell their asset while minimizing tax liability. If you want to learn more about 1031 Exchange or other ways to defer taxes, get in touch with our real estate investment planners. Fig Tree Capital Ventures LLC. has a team of investment planners to assist investors in real estate acquisitions. Call 866-304-9194 and we will be happy to guide you in the right direction.