Real estate investors looking for ways to combat next year’s tax bill with rental property tax benefits are probably in the rearview mirror now that tax time has passed. You can tap into the appreciation of your rental property without being penalized when you use a 1031 Exchange to expand your portfolio.
Please consult your tax attorney or CPA before making any decisions regarding your specific situation.
A 1031 exchange is what it sounds like.
1031 Exchanges allow you to defer capital gains taxes by selling one investment property and using the proceeds for the purchase of another (or more) investment property. There is a loophole known as the Starker loophole.
You can reinvest the proceeds of the sale of one investment property into many others. They must, however, remain of like kind. The term “residential-to-residential” can be applied to residential and commercial buildings. Buying or selling a personal residence cannot be done through a 1031 exchange. As well as vacation homes, the Internal Revenue Service imposes strict limits.
In addition, stocks, bonds, partnership shares, certificates of trust, and other items are not allowed for trading. Moreover, investment properties may not be traded for foreign property, personal residences, or stocks.
The capital gains tax doesn’t apply until you sell for cash years later. The long-term capital gains rate will only apply to you if you plan accordingly. Based on your income, you can expect rates of 15-20%.
Exactly how does the 1031 exchange work?
You can use a 1031 exchange as frequently as you like, and it doesn’t have any limits. Investing in real estate can be rolled over from one property to another. However, there are certain steps you need to take.
The first step in administering the exchange is to choose a qualified intermediary. Your replacement property will be purchased with the sale proceeds temporarily held by the intermediary.
Attorneys, accountants, or investment advisors cannot act as intermediaries since they must be independent. Nevertheless, your attorney can assist you in choosing one.
You should adhere to all applicable tax regulations, in addition to adhering to the strict deadlines, when working with your attorney. In addition, there are rules covering 45- and 180-day periods.
Observance of the 45-day and 180-day rules
Rule of 45 Days
Replacement property must be designated within 45 days. Your intermediary will receive the proceeds from the sale of your property. If the property is sold, you have 45 days to identify a replacement property (or properties).
A written request must be made to the intermediary. It must state and specify the property you’d like to acquire. You cannot receive the cash yourself. Again, your attorney will oversee this to ensure adherence to the timeline and regulations.
There is a 180-day rule
In the next section, we will discuss the 180-Day Rule. A delayed exchange of closing is the subject of this timing rule. It is imperative that the sale of the previously owned property be completed within 180 days of the sale of the new property.
Conclusion
You can free up more capital by performing a 1031 exchange in Colorado, when done correctly. Your portfolio and objectives will ultimately dictate what types of investments you choose.
