“Nothing is Certain Except Death and Taxes” Benjamin Franklin
As the Economy continues to rise so do prices homes prices. We are still way behind in building new houses to quench the insatiable buyer demand so inventory remains scarce. This has caused rental rates to inflate sharply with many people without purchasing options.
Investors have noticed the demand and many are investing in residential homes to with the purpose of renting them. Buying and selling residential investment property is very different than purchasing a home for your residence. As you can guess, it all comes down to PROFIT.
I have already discussed how to evaluate investment property when purchasing in the video seen here: Real Estate Investing Now I want to help you understand the benefits of a 1031 Exchange when selling investment property.
Taxes are a four letter word. HGTV offers Reality Shows demonstrating the benefits of flipping houses, but they often leave out the taxes due when selling an investment property. Did you know that most of the profit of a investment property is subject to capital gains taxes? When filing your next tax return after selling, you will have to pay federal and state capital gains taxes on any recognized gain. This is often 1/3 of your profit!
Section 1031 of the IRS tax code allows an investor to defer paying capital gains taxes on the adjusted gain (profit) if you reinvest in a “like kind” property. It is very important to remember that a Qualified Intermediary (QI) is needed to perform a 1031 Exchange and the cash from any sale needs to go directly to the QI after closing. A Qualified Intermediary is also your best source for up to date knowledge about the current tax rules.
The basic premise of a 1031 Exchange is that if you sell a property and exchange it for another “like kind” property within a certain time period you can defer paying capital gains taxes on the recognized gain. Of course, it is a little more complex, but here are a few simple guidelines:
- “Like Kind” means any piece of real property held for long term investment purposes that is not your principal residence. It does not have to be similar in any characteristics except for it is held as an investment.
- The replacement property (new) must be acquired at a “stepped up” basis (or debt) than the relinquished (sold) property. This basically means you have to reinvest all of the profit into the new property to defer all of the taxes.
- You must identify the replacement property within 45 days and purchase within 180 days of selling the relinquished property.
You must first contact a Qualified Intermediary and your CPA to determine if you are a candidate for a 1031 Exchange, but it is a great tool to have when selling your investment property. Most people are going to reinvest their profits into another investment vehicle. Wouldn’t you like to reinvest ALL of your hard earned profit?
I have helped several of my seller clients with 1031 Exchanges and I have helped buyers find and identify replacement property for their exchange. This experience has given me great insight to the needs of my clients and I have worked with accountants, lawyers, lenders, and qualified intermediaries to ensure the process is smooth and effective. Call me today at (402) 312-5076 or email me at Chris@NebraskaRealty.com if you would like to learn more about a 1031 Exchange and they can work for you.
Chris Bober is an Associate Broker and leader of Team Bober, a group of REALTORS® at Nebraska Realty in Omaha, NE offering a wide range of real estate services including home and new construction sales, land and farm sales, and auctioneering services. For more information please call Chris at (402) 312-5076 or email him at info@ChrisBober.com. TeamBober.com