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Home > Blog > Real Estate (Commercial And Residential) > Consider A 1031 Exchange If You’re Buying Or Selling Real Estate

Consider A 1031 Exchange If You’re Buying Or Selling Real Estate

HouseGavel

It’s no secret that buying and selling properties can be very profitable. Many people make good money buying properties, improving on them, perhaps renting them out for a bit, before selling them at a profit. But many people who do this kind of real estate investing forget one thing: Income.

Government Wants Its Piece

Anytime you make money, you can bet the government wants their piece of what you make, and that’s no difference when flipping real estate. The reality is that when you buy property and then sell it at a profit, you aren’t getting all of that profit. That’s because that profit is income to you, and there are taxes that are owed on that income.

Using 1031 Exchanges to Defer Taxes

There is one workaround, or a way to avoid paying taxes on value improvements to property: The 1031 exchange.

A 1031 exchange lets you delay the payment of taxes on the improvement of real estate, so long as you sell property, and buy new property. You are putting off your tax burden until later. The benefit of this is that it gives you the full value of the profits of the sale of your real estate, to use as payment or equity, in your new purchase.

Not Many Limits

You can do this conceivably, forever. There is no time frame to pay the taxes. And there’s no limitation on how many times you can “roll over” the taxes into new properties. You can do that over and over again, if you so choose. You don’t have to buy the new property immediately either; you have a 180 day window to purchase the new property. So long as you do, you can defer the taxes with the 1031 exchange.

You can even take advantage of the 1031 benefits if you refinance, and take out the equity in an eligible property. That is treated like a new purchase, allowing you access to the full value of the refinance, to use for whatever you want to use it for.

You only have to pay the taxes back when you don’t buy new property—for example, if you just sell property and don’t buy new property, or when you pass, and the estate may owe the taxes.

No Homestead Property

There are some limitations to a 1031 exchange. It can’t be used for your home. It must be used for business or commercial purposes (you don’t have to be a corporation, but the sale and purchase must be for profit, and not the home that you live in).

Additionally, the properties sold and bought, need to be the same kind of property. So you may not be able to sell residential real estate investment property, and use a 1031 exchange to buy a commercial retail building.

Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today for help if you are looking to buy and sell property, either for personal or investment reasons.

Sources:

investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

irs.gov/pub/irs-news/fs-08-18.pdf

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