Investors who are worried about their tax liability should seriously consider some of the benefits of a 1031 exchange. This allows property owners to avoid paying capital gains taxes by reinvesting the earnings that are gathered from the sale of real estate.
Holding onto the gains you’ve earned from selling one property will allow you to keep more cash in your pocket even while you continue to invest. It’s an effective investment strategy, and it can even help you diversify your real estate portfolio.
We’re often asked about the benefits of a 1031 exchange and how to execute this type of transaction. Today, we’re explaining how this works.
Why Should You Do a 1031 Exchange?
When you sell a piece of property, you are required to pay taxes on the money that you earn from the sale.
One of the ways to defer those taxes is to buy a new property – or several new properties – that are similar to the one you’re selling. This is especially attractive to investors who know they will have a large tax bill after a, particularly profitable sale.
The 1031 exchange is also beneficial if you have an older rental home that requires a lot of maintenance and attention. You can reinvest in a newer property to save money on repairs from the older home you might choose to sell.
How to Defer Taxes with a 1031 Exchange
There are a lot of requirements and timelines involved in this type of business deal. It’s important that you follow the specific steps when you want to defer your taxes with a 1031 exchange. If you’re not already working with a local property management company, contact a Champaign-Urbana property manager, a CPA, or a tax attorney.
Here’s an overview of what you’ll need to do:
- Make sure your property qualifies for the exchange. This tax benefit is meant for income-producing properties. You cannot sell the home you’ve been living in to buy a vacation condo.
- You’ll need to exchange with a like property or properties. The new property you choose must have a value that is the same or higher than the original property. If you walk away from the exchange with any proceeds, they will be taxable.
- Find more than one property to exchange with your current property.
- Follow all timelines. You’ll need to identify a replacement property within 45 days of selling your original property. Then, you have 180 days to close on the new sale.
- Use an intermediary and don’t take any of the cash from the sale of your property. The intermediary will hold your funds until they can be reinvested in your new purchase.
Champaign-Urbana Property Management and Investment Advice
The 1031 exchange is one good way to keep all of the money you earn off the sale of an investment. Remember to seek all the professional advice you can, because this isn’t a completely tax-free situation. You are technically deferring the payment of your taxes.
However, there is not a limit in place as to how often you can perform a 1031 exchange. Just make sure you’re choosing the right properties and handling the finances within the requirements of the law.
If you have any questions about how to take advantage of tax benefits, or you need help with a 1031 exchange, please contact us at Ramshaw Real Estate. We’re here to be your local property management resource in Champaign-Urbana.