Did you know that IRC Section 1031 allows real estate investors to relinquish or sell one property and replace it with another like-kind property?
It doesn’t end there; when you do this, you can defer the payment of any capital gains tax that would usually be due.
The basic rules of a traditional tax-deferred exchange are:
- Relinquished and replacement property must be like-kind.
- Real estate must be used for business or investment purposes.
- The replacement property must be the same or greater value than the property relinquished.
- Boot in a 1031 exchange can be created in several ways, such as receiving cash, debt relief, or personal property in your tax-deferred exchange.
- The name on the title on the replacement property must be the same as on the relinquished property.
- The replacement property must be identified within 45 days of the closing of the sale of the relinquished property.
- The replacement property must be purchased within 180 days of the close of the sale of the relinquished property.
Usually, the IRS does not allow you to conduct a 1031 exchange with your primary residence. That’s because the home you live in isn’t being used as an investment property or held for business purposes. Instead, your primary residence is used to provide shelter for your family.
If you are interested in exploring these exceptions, view the IRC Section 121 of the Internal Revenue Code. It gives some situations where you can conduct a 1031 exchange using your primary residence.
This is a powerful tool in the world of real estate investors because it helps to defer a large expense and is especially important if the profits generated will start to push you into a new tax bracket. Plus, communities love when it is used because it typically means that homes are being refreshed and improved.