If you're a seasoned real estate investor, you're likely familiar with the concept of 1031 exchange. If you're just starting out on real estate investment, then you're probably eager to learn about tax deferral option. We have prepared a primer on this important tool for your investment planning purpose.
A 1031 exchange, also known as a like-kind exchange or a Starker allows you to rollover your capital from the property you have sold to the property you have newly purchased. The idea being that you would be able to avoid taxes until you sold your properties for cash, some time later, and ideally save some money by paying only one long term capital gains tax. Even if your goals are not long term but you are looking to save some money now, there is no limit to how often you can use a 1031 exchange, and paying little to no taxes with this type of transaction may seem mighty attractive.
There are two basic guidelines that apply to most cases. First, the value of your replacement property must be equal to, or greater than the value of the property you have sold. And second, all of the net proceeds from your sold property must be used to buy your new “like-kind” property.
Along with these requirements, there are two timelines to keep in mind while processing a 1031 exchange. You have exactly 45 days from the day you sell your property to find potential replacement properties. This exchange of properties must be completed within 180 days of selling your former property. There are no extensions available, if the required transactions are not completed within the number of days given, you will have to pay taxes on your sold property.
Above is a basic overview of 1031 Exchange, there are processes of delayed exchanges, depreciation recapture, and other deeper aspects of a 1031 exchange that could be involved depending on each investor's personal situation. Given the strict requirements and tight deadline, most investors work with a tax advisor and an experienced real estate professional when they are pursuing a 1031 exchange. We have many experienced agents who frequently assist clients with 1031 exchanges, make sure you leave us a note when you're submitting your request so we can match you with the right local agent.
LessThan6Percent™ was born out of the belief that there could be a more transparent, efficient and cost-effective way for home owners to search for and hire a real estate agent when they are ready to sell their home. With a founding team possessing experience in building online marketplaces and developing online real estate communities, we set out to create an amazing, "so-satisfied-that-I-gotta-tell-my-neighbor" experience.
So that's our story: making the process of home selling better, faster and easier, one home at a time. Read about us on WSJ http://online.wsj.com/article/PR-CO-20130429-912590.html