There are currently approximately 15 million people in the US who own real estate investment property, and more and more of them are learning about the advantages of utilizing 1031 tax-free exchanges for postponing capital gains taxes when they sell their property. A 1031 exchange is a provision contained in the IRS code that permits investment property owners to sell properties and buy new property without being required to pay taxes on the sale of the old properties, taking into account stipulations relating to the use of the proceeds and time boundaries have been satisfied.
Investors in real estate have 45 days following the sale of their old properties to locate a new property and to follow with specific written notice stipulations, as set by the IRS. The acquisition of the new property must then close within 180 days. If those provisions are satisfied, the investor won’t need to pay federal income taxes on the real estate property, assuming the new real estate property is an investment like the one just got sold. The replacement property must be of equal or larger value.
The property may be several houses, farms, or other real estate, but it can’t be the real estate investor’s primary residence. The IRS forbids making use of a 1031 exchange for the purchase of a new home. Nevertheless, there is an exception to that regulation. If the real estate investor rents out a home for 2 years following the exchange, that home could then be switched to the real estate investor’s chief residence, since the home was initially used to carry out the stipulations of a 1031 exchange, which set that an investment home has to be replaced with another investment home.
If a property investor opts to take that route, after 5 years from the date of the new property’s acquisition, that home may then be sold and the taxes omitted, due to an IRS exclusion for the sale of a primary residence, which can be $500,000 for couples and $250,000 for an unmarried person.
This could be a great way to avoid taxes on a significant amount of money from investment in houses, but you will want to make certain you observed the tax code exactly. If you wish to learn more about 1031 tax-free exchanges, check out IRS.gov and confer with tax consultant, accountant, or lawyer. It can save you thousands of dollars while you’re coming up the ladder in your overall real estate investment strategy.