Because of its favorable tax treatment, investing in real estate can be extremely advantageous.
If you are considering selling an investment property and intend to purchase another “like-kind” property with the proceeds, a 1031 exchange should be considered. A 1031 exchange is a legal provision that allows a seller to sell one property, purchase another property, and defer capital gains taxes. (Section 1031 exchange does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, ETC.) This is strictly for real estate. How does it work?
- Both properties involved must be investment properties and of “like-kind”;
- You cannot experience any gain from the sale;
- The purchase price on the new property must be equal to or more than the net proceeds from the sale of the old property;
- You cannot act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) can not act as your facilitator. Everything must pass through a qualified intermediary (QI);
- The tax on the gain is deferred, not forgiven. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
For more information on Like-Kind Exchanges Under IRC Code Section 1031, please visit irs.gov or consult with your attorney.