All About 1031 Exchange and What It Means to You
Are you a homeowner looking to sell your existing home and buy a similar one with better prospects? Are you looking for the best way to save money on capital gains tax? Do not stress out; there is a provision you can take advantage of in order to secure your investment without losing value, in the name of capital gains tax.
As an investment property owner, 1031 exchange is the perfect option you can leverage to sell you home and receive the complete value without paying capital gains tax while investing the said fund in purchasing a similar property. With the 1031 exchange provision, you can defer paying capital gains tax on the amount received from selling your property.
What is the 1031 Exchange?
The 1031 exchange is the Section 1031 of the U.S. Internal Revenue Code that allows property owners to defer the payment of capital gains taxes on the income from the sales of an investment property if such amount is reinvested in a similar property or properties of similar or greater value. 1031 exchange is a tool from moving from one investment to another, usually real estate.
1031 exchange provides a window for you to sell an investment property and reinvest the proceeds in another investment property without paying capital gains taxes. If you have been eyeing a property in a more lucrative area, you can take advantage of 1031 exchange to sell the current property you are holding to raise funds and purchase the property without paying capital gains taxes.
What Does 1031 Exchange Mean to You?
If you have a property for productive use or rental income or business, you can exchange it for like-kind property. This means that you can exchange your investment property for another type of investment property, like exchanging a single-family residence for a duplex or a shopping center, or exchange your office complex for apartments. The 1031 exchange offers property owners the flexibility to change the investment property’s nature to meet your needs without breaking the law.
Working With Qualified Intermediaries
Meanwhile, you cannot implement the Section 1031 Exchange provision all by yourself; you need to work with approved or qualified intermediaries to facilitate the process. Section 1031 specifies that the funds received from the sale of a property are taxable. As a result, the proceeds will not be transferred to you (owner and seller), but it will be sent to a qualified intermediary, who will transfer the fund to the replacement property owner (the seller of the property you just purchased). This ensures that the proceeds are applied as indicated due to the delay of capital gains taxes.
Why Use 1031 Exchange?
If you are a real estate investor or property owner, you can take advantage of 1031 exchange to move up your investment from the existing property to another without being limited by capital gains taxes. There are several reasons you should consider utilizing the section 1031 exchange. Here are some of them:
- You may want to diversify your assets
- When you want to own a property with better return prospects
- If you want to merge several properties into one for efficient estate planning
- If you want to divide a single property into many assets
- If you want to reset depreciation clock
If you decide to sell your property and buy another without using the 1031 exchange, the income from the sale will be taxed accordingly. However, applying 1031 exchange allows you to defer the payment of capital gains tax on your property’s sales proceeds and purchase another. Deferring capital gains tax gives you more capital for re-investment in the replacement property. You should keep in mind that qualified professionals should handle 1031 exchange transactions.
One untold benefit of 1031 exchange is that if you plan to leave an estate for your heirs, 1031 exchange is the perfect tool to avoid paying capital gains tax, take the tax to your grave, and pass the property to your heirs through 1031 exchange at a stepped-up value.
1031 Exchange and Florida Real Exchange Market
If you are a real estate investor or you have a suitable property that can be used for 1031 exchange, Florida is the perfect location to look for a replacement property. There are significant developments and growth in the real estate activities in Florida over the years. And Florida, especially South Florida, will continue to experience an explosion in its real estate market for a long time due to the conducive business and real estate environment in the state.
The 1031 exchange applies to properties located in any of the 50 states of the United States of America. Contact us for suitable properties that meet your needs and application of the 1031 exchange. Find a qualified intermediary and let the evolution of your real estate investment and estate planning begin. Contact us; we will help you.