With real estate prices spiking in most parts of the country, many landlords are questioning whether or not now is the right time to cash in on some of the equity they have in their current rental properties so that they can ultimately purchase higher value properties. For many people, one of the primary concerns holding them back from making this move is the issue of paying income and capital gain taxes on the sale of their property. If you share in this concern, you should know that there is a way in which you may be able to defer these tax obligations so that you can take full advantage of the current market prices. This option is to utilize what is known as a 1031 exchange. Read on to learn more about how these exchanges work and the benefits they have to offer.
Understanding The Basics
A 1031 exchange is a tax break that is offered by the federal government under the IRS tax code 1031. This tax code provides real estate investors with the opportunity to defer tax obligations when selling a rental property. This does not mean that these taxes are no longer owed, but rather that the obligation to pay these taxes is put off until a later date.
In order to take advantage of a 1031 exchange, you must be using the proceeds from the sale of one rental property in order to purchase another rental property. Typically, the deferred taxes will not become due until you choose to sell your rental property without investing in a new property. For most investors, this can mean the ability to put off paying these taxes for many years to come. During the time that these taxes are deferred, you will be able to take advantage of the opportunity to grow your wealth through increased equity and the ability to collect higher rents each month. This ability can go a long way towards helping to offset the cost of paying the deferred tax amounts when the time does come to pay them.
Putting This Opportunity Into Action
While it may be quite easy to see how a 1031 exchange can be beneficial, effectively putting this opportunity into action can be a bit more complicated. This is because like most tax codes, the tax code that makes this opportunity possible comes with quite a few stipulations that must be met in order to qualify for the tax break you are seeking.
For instance, you will only be given a relatively short period of time after the sale of one property to close on your new property. This is why it is so important not to go it alone when choosing to take advantage of a 1031 exchange. Instead, you will want to reach out to a real estate agent that specifically offers 1031 exchange services to help ensure your meeting all of the criteria required to enjoy this wonderful wealth-building opportunity.