Using the 1031 Exchange
Investing in real estate is among the best ways one can make wealth. Just as you would find in any other investment, there will be risks and uncertainties. You have to deal with various taxes, such as capital gains tax and other tax rules. You may end up losing quite a percentage of the profits to these taxes. Luckily, there is the 1031 exchange. When you use it as intended, it gets to save you so much from payments of taxes. Here is more about your strategy for applying it.
You will notice that in most real estate investment, there is always more value to be realized from a sale, than what you had to spend on its purchase. The profit made in such instances is called capital gains. Tax authorities are always ready to collect taxes from such sales, no matter the nature of the asset sold. The amount payable depends on the duration of your ownership of the asset, and your income tax bracket. The longer the ownership, the less you end up paying in capital gains taxes, as that is looked at as a long term investment. You can, however, avoid paying those taxes legally, as long as the money made is used to buy another property.
You get to make the most of the 1031 exchange if you meet certain expectations, and do the transactions in a given timeframe.
The property in which you put the proceeds from the initial sale must be like-kind. The rule here is conveniently vague, allowing you to use any kind of property. You only have to use one with a similar value, or one that has a higher value than the initial asset. You also must use business or investment-specific properties.
The timeline dictates that once you sell the property, you have 45 calendar days to find a replacement property. You also have 180 days from the moment you sold the first property to have closed the next one. It is important you file for a tax extension if you do not see yourself meeting the set deadlines. You have to clear any other taxes you owe before the time is up. Those who fail to do so have to pay penalties and interest.
Considering how complex the tool is, you need to allow professionals to handle it for you. They get to hold the money from the sale and do the paperwork. Holding the money from the sale yourself means you are ready to pay taxes on it.
For those looking to get out of the real estate business finally, there is no need to worry about the capital gains tax payments. You can turn to this site for some info, and also these reasons why you need to go this route.
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