1031 Exchange to Defer Taxes in a Deal
When you sell a property, you pay capital gains tax on the sale.
Generally, that can be 15% or 20% depending on your income tax bracket.
The question many people ask is “Do I have to pay that?”.
The quick answer is yes, unless you do a 1031 exchange.
You want to consult a tax professional to get correct information based on your situation.
The only way to avoid capital gains is if you defer the taxes by converting the sale into another purchase.
By setting up a 1031 exchange, you buy yourself time to locate a property and purchase another property by using the proceeds from the sale.
There are rules associated with this, so you want to consult your real estate and tax professional.
When you are selling a business for instance, this can be relevant as well. Part of the sale may be for the business or goodwill. Another part of the sale may be for real estate, if there is any attached.
If there is any real estate sold there will be taxes on the profit (the sale price minus the purchase price minus improvements).
By implementing a 1031 exchange, this is where you allocate funds from the sale of a commercial property, and you place it in another property.
You will have time to find and locate a property (i.e. 90 days), so you can roll that money in to another attractive property, which defers taxes.
Eventually, if you sell the property you will have to pay taxes, but you can sell it in a year that is more favorable, for you, for instance.
If you pass the property on to your heirs, then they might be able to avoid paying the capital gains tax on it from a sale.
We are not tax consultants or tax professionals, so please be sure to talk to your CPA about this.
The reason understanding 1031 exchanges is helpful, because after the sale of a business or commercial property, you may want to buy another property with some of the cash as a means of investment.
If you were to wait a year and then buy a property, you will pay tax on the first sale, when you could have saved the tax payment altogether.
The reason this exists is to encourage investment in the marketplace.
If you were going to buy a commercial property from the sale, you don’t want to pay tax on the sale, and then put after-tax money in to another property.
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