Surprising as it might seem, the IRS can give you a leg up when playing the real estate market, explains an expert in 1031 exchange services here in Nevada. Under the section 1031 of the US tax code, you can hold on to the capital gains of a property you hold for productive use or investment.
Such properties include industrial warehouses, office complexes, apartment blocks, rental houses, and any property with an income. However, you need to play by a few rules to enjoy this support.
Designate the replacement property
Tax on capital gains can be anywhere from 15 to 30 percent of the profits you realize from a sale. Therefore, deferring the tax will amount to considerable savings. To realize these benefits, you need to identify the replacement property when making a sale.
Ideally, the property should be an equivalent value if not higher. The earlier you do, the better your chances of success as you have 45 days to identify the target property. Meanwhile, you need to appoint a qualified intermediary to handle the cash from the sale of your original property.
At no point during the exchange does the money find its way to your possession.
Ideally, you shouldn’t make any financial gains from a 1031 exchange except for the new property. For further gains, commonly known as boot, are taxable. As such, you need to approach the process with a great deal of care. Otherwise, this is money out of your pocket.
Sometimes, working out the boot might prove tricky as it involves other issues that the selling and buying price.
You need to account for mortgage and other debts. Failing to balance your liabilities on both properties can lead to serious headwinds. Even if you don’t receive any cash back, a decrease in liabilities on the acquired property is considered a gain and as such, taxable.