When the time is right for you to start making large investments to increase your personal wealth and secure your future, one thing many people are not prepared for are the various tax codes that carry hidden costs. However, if you educate yourself and invest wisely, you can make the tax code work for you.
One of the many benefits of investing in real estate is Internal Revenue Code Section 1031. Section 1031 does not adhere solely to professional real estate purposes, but it is an extremely important code to know if you are interested in investing in property. You may of heard Section 1031 referred to as “the Starker” or a “like-kind exchange.” Basically, 1031 allows the taxpayer to swap one business investment asset for another, without having it be taxed as a sale. At most, limited taxes are due at the time of the exchange.
By taking any profits you make off your real estate investments and rolling them in to a new property, the IRS does not see your initial investment as having a capital gain… so they leave it alone. And believe it or not, there is no limit to the 1031. You can do this year after year, property after property. However, once you decide to sell for cash you will have to pay a long-term capital gain rate tax, but you know… death and taxes and all that.
It’s important to note that the 1031 can only be used for investment and business properties. You cannot take the dividends from your rental home and roll them over into a new primary home or vacation house for yourself. The 1031 is about giving a break to those who want to contribute to their economy through smart business investments.
Timing is key when it comes to the 1031. Within 45 days of the sale of your property you must designate your replacement. You also have to close on the new property within six months of the sale of the old. This does not add on to the 45 days you have to designate, the time periods run concurrently. If you wait until the 45th day to designate, you only have 135 days to close.
While useful, Section 1031 is not simple. There are various loopholes and exceptions that you have to look out for. Read up on the code yourself and if you have any lingering questions, contact us. We have the expeirence and know-how to make sure you get taxed fairly on your investment properties.