Property investors often mistakenly sell their investment property or business and wind up needing to pay Uncle Sam thousands of dollars in capital gains taxes. They may not be aware of the tax laws in effect that provide them with the opportunity to retain their capital gains taxes on the sale of their business or investment property.
This law defers and can even eradicate taxes you would normally have to pay if you were selling your property. However, the money you make from selling your property must be used exclusively to purchase a like-kind property that you also intend to use for business or investment purposes.
Using a 1031 exchange is like a carpenter using a hammer to drive a nail, it gives him so much more leverage – and likewise the money you can save can be leveraged to purchase even more property to compound your wealth.
The 1031 Exchange provision has saved investors millions and millions of dollars, and it is well worth your time to explore the benefits of it for yourself. In order to reap those rewards, there are some specific procedures you need to follow.
Be sure that you select qualified intermediary (A.K.A. “Q.I.”) with a solid track record and professional reputation. Dealing exclusively with doing 1031 exchanges, a Qualified Intermediary is an expert with the facilitation of such a deal.
Your Q.I. provides a written agreement to change the transfer from and outright sale to an “Exchange” then transfers your relinquished property (that you are selling) and takes that money and uses it to purchase your replacement property on your behalf.
You must abide by the following 1031 rules to qualify for an exchange:
1. Firstly, the investment property that you are replacing must have been used for investment purposes or use in a trade or business and must be “like-kind” (i.e. US real estate for other US real state).
2. Second, you must find a replacement property if you haven?t already, clearly identify it in writing to your Q.I. it within 45 days. It is necessary to close on the sale on the replacement property within one 180 days.
3. To defer your capital gains taxes, all of the proceeds from the sale of the first property must be used to purchase your new replacement property.
Follow these 1031 rules and you will be in the best position to faciliate your exchange. The procedure is simple enough but even if the path seems a little complicated from time to time, it will be well worth it with the money you will save. Do yourself a favor and keep your capital gains by using a 1031 exchange instead!
Investors in the U.S. can save big money by using a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is similar to an interest free loan from the IRS.
Watch the video on 1031 Exchange Rules to learn more.
