Investment Property Exchange
1031 Exchanges - Tax Free Property Exchange
An investment property exchange will allow you to sell your rental property without paying taxes or paying the minimum in taxes. Sometimes called a "1031 Property Exchange" due to the IRS code reference, a 1031 exchange created a structure for you to trade "like kind" property without paying taxes. The property exchange must be made within a specified time period to qualify.
"Like Kind" property means that if you sell income producing rental property, the property you buy must be income producing investment property. You can not buy or sell a personal residence, though after a holding period (typically one year) you could convert your rental property into a residence, as long as that was not your intention when you purchased it.
When doing a tax free exchange the price of the new property must be equal to or greater then the price of the property you sold. Also, all of the equity received from the sale of the old property must be used in the purchase of the new property. If the purchase price of the new property is lower or you do not use all of the equity, you pay taxes on the excess. For example, the new purchase price is only 90% of the selling price, you will pay capital gains taxes on the 10% not the entire gain.
Anyone doing a 1031 property exchange must be aware of two time periods:
During the Identification Period you must identify what property or properties (there can be more then one sold or purchased) will be bought. The Identification Period is fixed at 45 days following the sale date of the property being sold. The Exchange Period lasts 180 days from the date the property you sell is relinquished.
Taxes due are always based on taxable gain. Note that you must use all of your equity in the purchase of a new property. However, this is not the same as gain. If you had refinanced the property (tax free) and had little equity, that is all you need to use in the purchase of the new property. This is critical to understand - if you want cash out of your investment property, refinance before you exchange!
Finally, you must uses an intermediary to exchange the property.
IRS rules change routinely. Therefore, consult the IRS Investment Property Exchange Rules directly
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The materials contained on this website are provided for general information purposes only and do not constitute legal or other professional advice on any subject matter.
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