When you sell real estate used for investment purposes or commercially, and reinvest in a new property, you have to pay income taxes on the realized profit. That’s when the 1031 tax deferred exchange comes into use. The 1031 tax deferred exchange allows you to use the profits made from the real estate property you sold for a new property to acquire your next properties. A great opportunity, is it? 1031 tax deferred exchange is only able to be used for investment and income property, not for your personal use on property you want to buy for yourself and family. In order for you to be able to use the 1031 tax deferred exchange you must adhere to the following:
- The net sale price of the property you are buying must be equal to or greater than that of the property you were giving up.
- The profits from the property you are selling or giving up must be used to purchase the new property you want to get.
- The property you are buying has to be similar to your old one. For example if your old property was used for business then the one you are purchasing must be used for the same.
After you have abided by the above, then you can begin the process of “exchanging” the property so to speak. How do you go about that? First, you have to select someone who can do paper work and know about the 1031 tax deferred exchange. Then, sell your investment property to the person who wants to buy and make sure you let them know that you are doing a tax deferred exchange. Within forty five days or less, identify the replacement property. Last but not least, you have to claim the property you identified.
That’s how a tax deferred exchange goes. It’s simple and takes nothing but dedication, hard work and in the end you can even save some money.
