Savvy investors use 1031 exchanges to defer capital gains tax on the sale of investment property. These transactions also provide an avenue to defer depreciation recapture, healthcare, and state taxes, as well. This is a perfectly legal investing strategy allowed by the IRS. However, there are certain criteria you must meet to reap the full benefits of an exchange.
How 1031 Exchanges Help Investors Defer Capital Gains Tax
1031 exchanges are also called “like-kind” exchanges. Successful exchanges entail the sale of one property and the use of those proceeds to purchase new property. Only investment or property used for business qualifies for an exchange.
The IRS requires investors to use qualified intermediaries to expedite exchanges. Investors have 180 days to complete the exchange to defer capital gains taxes. The clock starts ticking the day the original property is sold. At that point, investors must identify replacement property within 45 days. To clarify: You can purchase one or multiple replacement properties with the proceeds from the sale of the relinquished property. However, the total cost of the new property should equal or be greater in value than the original parcel’s net selling price.
Investors appreciate the benefits 1031 exchanges present. They defer capital gains tax every time they use exchanges to buy and sell real estate. In fact, investors strategically use 1031s to defer those taxes to capture additional capital to reinvest. Another key point is that exchanges are also used to acquire real estate in other states and to diversify or consolidate different types of property.
If you want to learn more about exchanges, read this article to learn additional benefits and details of these transactions.
You can also contact Midland if you have questions. As a qualified intermediary, our firm handles hundreds of 1031 exchanges each year that help our clients defer capital gains taxes and use those saved funds to reinvest.