There are at present approximately 15 million people in the United States who have real estate investment property, and an increasing number of them are discovering the benefits of using 1031 tax-free exchanges for deferring capital gains taxes when they sell their property. A 1031 exchange is a provision contained in the IRS code allowing investment property owners to sell properties and buy new ones without paying taxes on the sale of the old properties, taking into account stipulations pertaining to the use of the funds and time limits have been satisfied.
Property investors have forty-five days after the sale of their old properties to find a new property and to follow with particular written notice provisions, as outlined by the IRS. The purchase of the new real estate property must then close within cardinal days. If the provisions are satisfied, the property investor isn’t required to pay federal income taxes on the property, assuming the new property is an investment identical the property that just got bought. The replacement real estate property should be the same or bigger value.
The property can be several homes, farms, or other realty, but it cannot be the real estate investor’s chief home. The IRS prohibits using a 1031 exchange for the purchase of a new house. Still, there is an exception to that regulation. If the property investor leases out a home for two years following the exchange, that home may then be switched to the investor’s place of residence, since the home was initially utilized to meet the conditions of a 1031 exchange, which specify that an investment house should be replaced with another investment house.
If an investor prefers to take that route, after five years from the date of the new home’s purchase, that property can then be sold and the taxes left out, due to an IRS exception for the sale of a chief residence, which can be $500,000 for couples and $250,000 for a single person.
This can be a great way to avert taxes on a sizable profit from investment in homes, but you will want to make certain you’ve observed the tax code carefully. If you wish to learn more about 1031 tax-free exchanges, visit IRS.gov and see your tax consultant, accountant, or lawyer. It could save you thousands of dollars while you’re going up the ladder in your general real estate investment scheme.