There are a select few instances where a person would want to sell a real property. One of the less common reasons is to buy a property with a better potential as an investment.
If you’re planning to do this type of exchange, reputable property exchange companies such as 1031 Exchange Place can help guide you through the process.
Capital Gains Taxes
Whenever there is a transaction that involves money, there are taxes to be paid, among other things. When selling a property, you must pay capital gains taxes for the income earned from the sale. But there are instances when there is no gain. Sometimes, the new property costs the same as the older one.
Whenever transactions involving like properties occur, there is a provision where the seller or buyer does not need to pay capital gains. This is included in IRC Section 1031, which provides an exception for selling and buying like properties if done within a short period. This allows the owner to defer the payment of the capital gains tax.
This does not necessarily mean that the property should be exactly the same. Instead, the new property has a purpose similar to that of the older one. Another important provision is that there should be an intent in buying a like property. That means if the owner wants to sell a house to finance an office building, then these are not like properties.
The purpose of Section 1031 is to allow the property owner to continue to invest even if the focus has shifted. When this happens, there is no tax liability in the transaction. An example of allowable transactions is selling a property in one area and buying the same type of property in a better location.
The Section 1031 transactions are powerful tools to improve your investment portfolio without leaving real property investing. You’re just giving up a property to find a better and more profitable investment.