If you're a real estate investment aspirant, then you might have heard about a way to defer tax payment for a sale. The technique is properly called 1031 Tax Deferred Exchange. But you might wish that you know more about it and how to avail for this tax law incentive. Finally you there's a law-mandated benefit that says it's legal for investors to delay the payment of capital gains tax if the requirements have been followed.
This is under section 1031 of the U.S. Internal Revenue Code.
The number one requirement you should meet is that you should spend all the capital gains to purchase the same property. Another condition you need to accomplish is that you must find a suitable property to exchange for the one sold within a specified amount of time, which is 120 days from the date your property is sold. After you have identified, meaning put the possible exchange property under contract, the acquisition must also be made within a specified amount of time from the date of identification - extension is not allowed.
You should also know that the exchange property could not be a house you want to buy for self-use. A lawyer or an intermediary such as a 1031 service company is also needed to facilitate the process. Hiring the service of these people is also another condition to qualify for 1031 exchange. These people will facilitate the papers and the contracts involved in the process.
For instance, the intermediary is tasked to handle the capital gain for your, purchase the exchange property, and transfer the ownership to you. Your papers must also state clearly that you want the sale and the purchase of the exchange property to cover the privilege under section 1031 of the tax law. Your intermediaries are tasks to ensure that your contracts clearly state your intention. This is part of their job, which by the way you are going to pay them for. The five kinds 1031 exchanges include simultaneous, delayed, build-to-suit, reverse, and personal property.
The kind of 1031 exchange discussed above is the delayed kind, which is the most popular in real estate. This kind of 1031 exchange involves an allowed delay of time from the sale of the property to the purchase of the exchange property. The obvious benefit of 1031 exchange is that you can postpone the payment of the capital gains taxes until you do the final sale. You still have to pay the tax sometime in the future when you want to finally let go of the property for good or you can't find an exchange property in time. But in the meantime, wouldn't it be great to skip taxes when all you want is to exchange your property for a more profitable one? This privilege is provided by law under the tax code section 1031 and all real estate investors are eligible to apply.
No matter if you're a small company or a starting individual, you can always be granted with the privilege provided that all the requirements are met.
Author Jack Cockrel is a real estate investor based in Atlanta, Georgia. He has made more than 750 real estate transactions since 1996. For Real Estate Investing Tips get his free course Real Estate Investing Free Course.