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Do you have an investment property that you would like to get out of and move into a better property but the capital gains tax and depreciation recapture tax outweigh the upside of the new property? If so, you need to become familiar with the 1031 exchange.
No one likes to pay taxes but there are other reasons that a 1031 exchange might be the right vehicle to make your next real estate investment. This transaction works well for anyone that has built up equity in a property and has steadily depreciated the value. When you sell depreciated property for more than you bought it, you are liable to the taxman for both a 15 percent capital gains tax and a 25 percent depreciation recapture tax. These can be substantial barriers to upgrading to a better investment property.
1031 refers to a specific section of the tax code allowing you to indefinitely defer the payment of those taxes when you buy a new property worth as much or more than the property you are selling. Of course, there several rules that apply. The most important are:
The value of and equity in the replacement property must be equal to or greater than that of the property you sell.
The debt on the replacement property must be equal to or greater than the debt on the sale property.
All of the net proceeds from the sale of the property must be used to acquire the replacement property.
You have 45 days after the date that the sale property is transferred to identify potential replacement properties. The exchange must be completed within 180 days after the transfer of the sale property, or the due date of the taxpayer’s federal tax return for the year in which the sale occurs, whichever is earlier. No extensions are available.
There are several different types of 1031 exchanges such as the delayed exchange and the improvement exchange.

All the Best,
Peter Vekselman

PS: Private Real Estate Investment Coaching Available:
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