Jul
23
1031 exchange, holla
Posted by Granville Haas under For Buyers, For Realty Professionals, For Sellers, General Information, taxation
1031 is a way for real estate investors to defer paying taxes on their real estate. It is not a magic potion that means no capital gains will be paid on real estate investments (wouldn’t that be nice), but to the savvy buyer it can be a way to defer taxes indefinitely until death even:) That’s awesome, apparently death can stop you from having to pay taxes, that old addage about “death and taxes” shows why it stands the test of time.
Anyhow, heres how it works. If someone is selling their home they can exchange for a new property and defer paying capital gains tax by spending all the profit on a new home. It’s not a perfect situation but it may work for some, some people seem to like the idea of deferring their taxes interest free, but if you can’t touch the equity and put in your bank account, then is it really there. If a tree falls in the forest, does it make a sound? A couple of rules are in place for 1031’s, technically it must be like for like properties. As far as I can tell this just means both properties must be income producing properties. It can be commercial real estate, vacant land, rental properties, apartments. Anything but primary residences, vacation homes, and land under development.
Once Mr. investor decides to sell the land, you sell it like normal and the deal closes. Once the deal closes, before the investor can touch the profits, the money is transferred to a qualified intermediary. Within 45 days of the closing the investor MUST identify at least one property of greater or equal value to the property that’s been sold. After the 45 days the list of homes identified as potential swaps is recorded with the qualified intermediary. Then the new purchase, (partially funded by the profits from the original deal) must be closed within 180 days from the date the first property was sold. also if the second deal is closed for less than the profit derived the the investor gets some red meat and that is taxed.
Boom, bam then when the second property is sold the sales price minus the price the investor paid for the first property is created as taxable income, so tax is eventually paid but it is deferred. The investor also could continue to defer payments until the cows come home but the problem with doing that is they could never spend their equity on anything except real estate. Personally, not my style, I like to do what I got to do and not run away from my problems, but that’s just me, and there are many situations where deferring taxes interest free can be a good idea, maybe you can explain them to me!-Grant Haas
http://granthaas.yourkwagent.com
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