You must keep all your capital gains following a property sale because it grows your purchasing power when buying a replacement property. If you think that you can put your money to better use than passing it to the government, then you’re the perfect candidate for a 1031 tax exchange. Outlined under Section 1031 of the tax code, it is a legal way to skip paying capital gains taxes to the Internal Revenue Service (IRS). The government lets you defer paying taxes after putting a commercial property on the market. To prevent unscrupulous individuals from abusing this right, IRS strictly regulates the process. The government body will have you on a tight leash to ensure that you comply with all the requirements.
Be on time
To be eligible for the tax deferment, you must adhere to the six months deadline. Once you have sold your current holdings, you have precisely 45 days to identify up to three replacement properties. Each of these properties must have a commercial use to qualify. After the 45 days, you have the remaining 135 days to close the sale. However, that is not to mean that you have to take the entire duration. In fact, the sooner you can get it done, the better. It means that you get to take possession of the new property. If you played your cards right, the process could leave you in possession of more valuable properties with a higher rental income.
As a silent partner in your investment journey, the government is averse to taking losses or regressing. Therefore, you are only allowed to buy a property that is of equal or higher value when taking part in a 1031 property exchange. That’s the primary drive behind the property swap—to move on up in the world of investment. When IRS forgoes their pound of flesh, they want you to put the money to good use, and that is to reinvest cash in a more valuable property. You have the liberty to purchase a property worth up to 200 percent the selling price of your building. That means that you get to grow the value of your property holdings and build your wealth while lowering your debt burden.
Diversify your holdings
Diversifying is more of liberty than a hard requirement when taking part in a property exchange. It lets you spread your risk over several sectors or even across state lines. You get to take advantage of several property markets, which is an excellent way to grow your return on investment. Replacing one property, with several similar properties spread over many states, lets you pick the most profitable units. Your portfolio can have anything, from duplexes, a block of apartments, to agricultural land and warehousing facilities.
Taking part in a section 1031 property exchange is an incredible way to build your wealth and grow your holdings in commercial real estate. With the help of a credible expert, you can adhere to all the laid-down requirements. IRS will have you on a short leash during this time, and you need to toe the line.