It’s important to be clear from the outset that 1031 tax deferred exchanges are a complicated phenomenon, and this overview will not provide you with all the information you will require in order to go through with one. Rather, Home Key Title & Closing Inc. would like to offer a simplified guide to 1031 tax deferred exchanges to give you an idea of their function.
What’s the function of tax deferred exchanges?
Tax deferred exchanges are a way in which regular taxpayers can exchange business real estate without having to pay the capital gains tax associated with the sale of real estate. Effectively, you can swap one property for another without incurring any taxes. With proper estate planning, you can in theory continue exchanging properties over time without ever incurring capital gains taxes.
Which properties qualify?
Your personal residential property doesn’t qualify for tax deferred exchanges, but any other type of real estate used for business, trade or investment is eligible. You need not swap one type of real estate for one of the same, or even a similar, type. It’s perfectly possible to swap raw land for an office complex, for instance.
Does it have to be a straight swap?
No! It’s unlikely that you’ll find a seller of a property you want that also happens to want your property, but fortunately you can perform what is known as a ‘delayed exchange’ in which you sell your property and, within a time limit of 180 days after your sale, buy the property you have identified as your exchange. This frees you up to shop around.
How do I go about this?
The IRS require that you provide very clear written intention to take part in a 1031 tax deferred exchange, and it’s vital that everything be legally watertight or you could incur serious problems including higher taxes than you would have paid on a simple sale. That’s why we strongly recommend that you hire a professional to assist you through the process.
If you’re interested in learning more about 1031 tax deferred exchanges, contact a professional team such as the one you’ll find at Home Key Title & Closing Inc. We also specialize many other services, such as providing title insurance in Westborough. Call (508) 475-5502 to learn more about how we can help you.
Make sure to take a look at our previous posts for tips and guides on topics including home staging in winter months.