As an investor who owns one, two, or more investment properties, there may be a time when you will consider selling one of your properties. We always recommend deferring your taxes as long as possible. Ultimately the decision to pay taxes on a real estate gain is completely your decision and we always recommend speaking with your tax professional before making the final decision.
What is a 1031 Exchange?
If you sell an investment property and use the proceeds to buy another qualifying property, you will not have to pay taxes on the gain immediately.
This is the IRS tax code for a tax deferred exchange in relationship to investment property. This section of the IRS tax code allows an investor to not pay any taxes on the sale of a non owner occupied property as long as they purchase a qualified property. So what does all of that mean? What it means to the rest of us is that if you sell an investment property and use the proceeds to buy another qualifying property, you will not have to pay taxes on the gain immediately. What you have done is defer the payment of those taxes to a later date – possibly to when your heirs receive the property.
A definition of this code can be found at the IRS website at: http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html
The IRS is the definitive source for all tax related information.
Why would you do this?
Let’s take a very simple example to illustrate why we recommend this for our clients whenever the chance.
Let’s say that the taxable gain on your investment property would be $100,000. Working with this $100,000 you have a couple of options. Truth be told, you may have more than the two options listed here so please speak with your tax advisor or call us at 562-989-7111 and we can refer you to a great tax advisor.
Sell the property and choose not to do a 1031 exchange. If you are in a 30% tax bracket and your taxes on the gain are at 30%, you would now be left with $70,000 to invest or spend as you see fit.
Sell the property but choose to do a 1031 qualified exchange. Now instead of only having $70,000 you now have $100,000 to invest. So by choosing to purchase more property you have an extra $30,000 to invest. This is a great option to keeping your money in real estate.
We hope this information was helpful. We can refer you to many qualified 1031 Exchange companies and tax advisors. Please don’t hesitate to call or e-mail us!