When it comes to buying or selling a home, there are almost as many different reasons to do so as there are interested buyers and sellers. Some need a new place to live immediately. Others may be flipping multiple properties or seeking profitable investments. But one popular, but little-understood real estate investment strategy is the 1031 exchange – named for that particular section of the IRS Tax Code.
Chad Osborne, president and co-founder of Call It Closed International Realty, joined Gulf Coast News to give you the lowdown on the 1031 exchanges. In short, it allows you to defer capital gains tax on the sale of one investment property by reinvesting the proceeds into another property with a similar purpose.
It's also known as a like-kind exchange. That means you must involve real estate properties, not personal property, and it has to be in the U.S. Now, there are strict time limits. The replacement property must be identified within 45 days, and the exchange must be completed within 180 days. The 1031 exchange allows you to defer (or postpone) the payment of capital gains taxes until the eventual sale of the replacement property. The current capital gains tax rate is 15-20%, depending on income.
To have a successful like-kind exchange requires the services of a Qualified Intermediary, also known as a QI, or exchange accommodator, to ensure you don’t have control of the proceeds from the sale of your relinquished asset.
As Tax Day approaches, there are other ways to avoid, or lessen, the impact of capital gains taxes when it comes to selling a primary residence, vacation home or investment properties. It’s called a Section 121 exclusion. It allows for the exclusion of up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.
For more information, visit Osborne online at CallItClosed.com .
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