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February 16, 2020

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When to Turn to the 1031 Exchange Tool

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. There will be several taxes involved, such as capital gains tax and other tax rules. These taxes will eat into the profits you make. You can turn to the 1031 exchange. If applied within the rules and timeframe, you can save so much from the taxes. Here is more about your strategy for applying it.
In most real estate transactions, you tend to make more from a property than you spent when buying it. That profit that comes from such a sale is what is commonly referred to as capital gains. The tax authorities are always ready to receive taxes from those proceeds, whatever asset you had to part with. 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. The way to save yourself from those tax payments is to buy another property with the money you made.
The 1031 exchange makes profits for you if you meet certain requirements, and complete transactions in a given timeframe.
The property in which you put the proceeds from the initial sale must be like-kind. You can use any kind of property to do so since there are no concrete specifications. The only expectation is that it be of the same or higher value. The properties in question also have to be for business or investment purposes only.
You are also expected to find a replacement property in 45 calendar days’ time the moment you sell the first one. At the same time, you have 180 calendar days from that initial sale to close on the sale of the next property. If you see yourself not meeting those deadlines, you need to file for a tax extension. It is important that you also do not owe any other taxes in that duration. Those who fail to do so have to pay penalties and interest.
With so many complications, it is best to use a firm to handle those details. They get to hold the money from the sale and do the paperwork. The moment you possess any money from the sale, you need to pay taxes on it.
Should you at some point decide to quit the real estate business, you can avoid paying the deferred capital gains tax. You can check out this site for more info on how, and these reasons why it is a good idea.