There are a variety of different ways that people will invest their money and their time to help boost their prospects for the future. Different tools such as Roth IRAs, stocks, and businesses are all ways that investors may try to grow their assets to help build their pool of resources. Investment properties are another popular way to achieve this. Real estate can grow in value, sometimes exponentially, if purchased at the right time in the right area. Knowing when and how to sell these investment properties is an essential part of making investment properties “work” for you. After the sale, there can be important tax issues and repercussions. One way to help make sure your investment capital continues to work to your advantage without having to pay a huge chunk of taxes after the sale is called a 1031 exchange.
Under the current tax code, if you sell a business or investment property, you will have to pay taxes on the gain at the time of the sale. However, a 1031 exchange is an essential exception to this rule. Section 1031 of the tax code provides that if you “swap” one investment property for another, your tax obligation on the gains you acquired from the sale of the first property will be deferred. These are also often referred to as “like-kind” exchanges. In order to qualify for the benefits of a “like-kind exchange,” the relinquished property and the newly acquired property must both be held for use in investment or business. A personal home or a vacation home will not qualify for treatment under section 1031. Moreover, both of the properties must be similar, meaning they have to be of the same nature or class. It is immaterial whether both properties are of the same quality, and there is a lot of flexibility as most commercial properties will be considered “like-kind” even if they are not the exact same. For example, exchanging an office building for an apartment building would likely qualify, even though the purpose of the two properties is very different. Some properties are specifically excluded, such as property held with the primary intention of selling it. If an investor makes too many exchanges in a year or sells a property acquired through a 1031 exchange too quickly, he or she could be considered a property dealer which will then require the owner to provide proof it was held strictly for investment and not for sale.
Real estate investment is an effective tool for your future, but it is essential for you to understand all the rules to make sure you’re doing it right. Call us today at (320) 299-4249 so we can talk about your property and what we can do to help you.