A Legal Way To Avoid Paying Taxes On Your Property Sale
The 1031 Exchange
Section 1031 Exchanges, which have become more popular since the mid-90s, allow investors to defer federal income and state taxes.
- By deferring the tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes.
- Any gain from depreciation recapture is postponed.
- You can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.
A 1031 exchange is applicable when someone sells a property that was used as part of a business or an investment. But they must use the money from the sale to purchase another property
to use for business production or as an investment. All while
deferring the payment of federal income taxes
and some state taxes on the transaction.
The theory behind Section 1031
is that when a property owner has reinvested
their proceeds into another property, the personal economic gain
has not been established in a way that generates funds to pay any tax. In other words,
the property trader’s investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a “paper” gain.
The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
If you need more information or have a specific situation, please call us at (949) 682-9930. If you don’t live Orange County, we are connected with many great agents in different cities. There’s a good chance we have connections with agents near you. So contact us and our team will help you with your real estate needs or we will introduce you the right agent for you.
