How the 1031 Exchange Works
Real estate is known for never letting down those who invest in it. As with most investments, you can expect there to be some risks and uncertainties. You have to deal with various taxes, such as capital gains tax and other tax rules. These taxes will eat into the profits you make. Luckily, there is the 1031 exchange. You only need to use it as intended for it to save you so much you would have paid as taxes. Here is more about how you can use this option to your advantage.
For the most part, real estate investments tend to give you more money than you spent while purchasing them. The profit you end up making in those scenarios is what is referred to as capital gains. The tax authorities are always ready to receive taxes from those proceeds, whatever asset you had to part with. The figures in question come down to the duration of your ownership of the asset, and your income tax bracket. The longer you owned it, the less you pay in capital gains taxes since it is a long term investment. You can, however, avoid paying those taxes legally, as long as the money made is used to buy another property.
The 1031 exchange works in your favor if you meet certain requirements, and all transactions are within a specified timeframe.
Money made from the first sale has to go into a like-kind property. You are free to use any kind of property, as there are no clear definitions. The only expectation is that it be of the same or higher value. You also must use business or investment-specific properties.
You are also expected to find a replacement property in 45 calendar days’ time the moment you sell the first one. You then have 180 days from the time you sold the first one to have closed the next property. It is important you file for a tax extension if you do not see yourself meeting the set deadlines. You have to clear any other taxes you owe before the time is up. Failure to do so attracts penalties and interest.
When you look at the tricky nature of the facility, you will appreciate letting experts do it for you. They get to hold the money from the sale and do the paperwork. If you were to touch any amount from the sale, you would be forced to pay taxes on them.
For those looking to get out of the real estate business finally, there is no need to worry about the capital gains tax payments. You can visit this site to understand how, and read these reasons why you need to go with it.