What is a 1031 Exchange?
How to Avoid Capital Gains Taxes:
First, a 1031 exchange is the nickname given to discuss section 1031 of the U.S. Internal Revenue Services Tax Code. In short, a 1031 exchange states, if a person exchanges one investment property for another, they may be able to avoid capital gains taxes. Furthermore, 1031 exchanges often apply to properties like buildings or land. However, 1031 exchanges do go beyond just physical property under certain circumstances.
1031 Exchange Relevancy
Above all things, a 1031 exchange can allow real estate investors the ability to avoid capital gains taxes. In addition, this can help real estate investors build their wealth. To simplify, let’s say you purchase a property for 700,000 dollars and you sell it for a million. In theory, you would have made a 300,000 on your investment. However, that 300,000-dollar amount will shrink due to capital gains taxes. Therefore, by using a 1031 exchange you may possibly avoid paying capital gains taxes. To clarify, 1031 exchanges allow real estate investors to reinvest with their profits rather than pay taxes on them. In conclusion, this type of exchanges allows investors to make more money, while spending less.
Qualifying Properties
In short, the properties involved with 1031 exchanges will vary from case to case. Most importantly, the property involved must be considered “like-kind” in the eyes of the IRS. At times this can be confusing, and it is best to reach out to a real estate attorney who can make sense of the situation.
1031 Exchange Restrictions
First and foremost, people should be aware that 1031 exchanges only apply to investment properties. Therefore, they are not to be applied to your personal property. Furthermore, for a property to be applied to a 1031 exchange, you must fully own it.
Do I Need a 1031 Exchange?
If you are a real estate investor, a 1031 exchange can be useful in helping you avoid paying capital gains taxes. If you are not a real estate investor, there is no reason for you to be concerned about 1031 exchanges.
