In, fact, the following taxes may apply: long –term federal capital gains, state taxes, depreciation recapture, and the net investment income tax. These taxes can be as much as 40% in some instances.
If you’re selling real estate and plan to re-invest the proceeds from your sale, this tax burden will drastically reduce the amount of money the seller can reinvest.
You see, section 1031 of the IRS Code allows an investor who is selling business or investment real estate to complete an exchange by purchasing other like-kind property. If done properly, this allows the investor to defer up to 100% of the taxes otherwise due at the time of sale.
This definition is pretty broad, since ‘like-kind property’ can be anything from raw land, farmland, or rental and commercial properties. Any of these property types can be exchanged for any other property that is also going to be held for business or investment purposes.
By deferring taxes on a property sale the investor can preserve the equity they have earned and preserve the wealth that they have worked hard to create with this real estate. Additionally they can realize further benefits related, income stability, efficient estate planning and reduced management responsibilities
Typically, to defer all of the taxes due in an exchange an investor must do two things: purchase property equal or greater in value as the property they sold and reinvest all of the cash received from the sale.
Generally, if you have a mortgage on your property you must add additional cash to your purchase of replacement property equal to the amount of the mortgage, or take on an equal or greater amount of debt to replace it.
You may replace a single property with multiple properties, or an interest in a Delaware Statutory Trust that owns more than one property.
Ready to get started? Great! Let’s start by taking stock of your current property to determine which 1031 options may be right for you.
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