Strategic Tax Planning – 1031 Exchanges – LNK Tax Group
Fortunately for investors, there is a way to avoid paying both capital gains and depreciation recapture tax on the profitable sale of any investment property. This is known as a 1031 exchange, which means that if you sell one investment property, but use the proceeds to acquire another, you can defer paying taxes on the sale.
There are quite a few rules for 1031 exchanges but here are some of the key criteria that need to be satisfied for a successful 1031 exchange:
- The exchange must be completed within 180 days. From the date you sell your investment property, you have 45 days to formally identify potential replacement properties, and a total of 180 days to close on the purchase of a new property or properties.
- You can sell more than one property as part of a 1031 exchange, and you can acquire more than one property. The number of properties you sell and acquire doesn’t necessarily need to be the same.
- In order to defer all of your taxes, the replacement property or properties must be acquired for at least as much as the original property sold for. And you’ll need to carry at least as much debt on the replacement property as you had on the property you sold. For example, if you sell a property for $500,000 with a $300,000 mortgage balance, your new property or properties must meet or exceed both of these figures to defer your taxes.
- You can choose to complete a partial 1031 exchange. If you acquire a replacement property for a lower purchase price, or with less debt, than the original property, you simply pay capital gains and depreciation recapture on the difference.
Tax Savings Range:
depends on the deferred capital gain but this is usually a substantial amount
Disclaimer:To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Always seek advice based on your particular circumstances from an independent advisor.