Have you ever want to sell one of your properties or regret buying one in a specific area. This happens to a lot of investors and often the find themselves contemplating whether its worth it or not due to a hefty capital gains tax bill they may incur at the end of the year. The IRS has offered a unique way to help investors in such cases and its called a 1031 exchange. By doing a 1031 exchange it allows the investor to sell their property and reinvest the proceeds in a new property and to defer all capital gains taxes. IRC Section 1031 (a)(1) states: “no gain or loss will be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged only for property of comparison which is to be held either for productive use in a trade or business or for investment.
This may sound little complicated and of course there are rules you have to follow. In order to complete such a transaction you must go through an authorized 1031 exchange company to conduct your transaction. They generally charge between $750-1000, these fees will come out of your hud proceeds. This companies will go over all the guidelines and explain the steps to ensure your transaction goes smoothly. The most important thing to remember is to not sell the property before you plan on doing this. There are rules which involve you having to find the property you are exchanging it for within a 45 days of selling and have 6 months to close on it. You cannot sell and collect any funds and then try to find a property to replace it. The transaction must go through he 1031 exchange company in order for it to be valid. Also this will only work if the property is in a company name not person and names cannot be changed between properties.
Written by Scott Esmail