Don’t Pay Taxes–Do A 1031 Tax Exchange
Did you know you can avoid taxes on real estate appreciation? You can keep buying and selling Steamboat real estate while rolling the appreciation into the next property until you find the place you want to live full time. Then, if you move in for two years (and have owned it for five years), you can sell that property and take the $250,000 (singles)/$500,000 (married couples) tax free exemption just like on your primary residence. The best part? No IRS bill.
A 1031 exchange, also known as a like-kind exchange, allows investors to sell off an investment property without paying capital gains taxes if they purchase another property (or properties) of equal value within 180 days. Consult a tax advisor for your situation, but here are a few rules to follow:
- Don’t use your investment property more than 14 days a year.
- Use a Schedule E form when you file your taxes.
- The mortgage amount needs to be the same or higher on your new property. Smaller loans are called “boot” and the difference can be taxed.
- When you sell, make sure you follow these guidelines: When your property sells, make sure you identify the new ones within 45 days according to 1031 rules. Then, close on the one(s) you choose within 180 days. The number of days is critical, and 25% of exchanges do not qualify because the buyer/seller goes over the number of days.
- You must use a Qualified Intermediary to hold the money between properties. Don’t have a check issued to you, or it invalidates the whole deal.
- There is no IRS rule stating how long you should hold your property before you sell it. Conservative accountants recommend 2 years. Others recommend one year. With a good reason and plenty of evidence, you can exchange within the first year–just don’t be surprised if the IRS comes knocking!
- There is also no ruling on Fractional Ownership. If you own a 1/8th or 1/4th share, be careful using it the full 14 days then claiming it as an investment property which qualifies for a 1031 exchange.
Check out this website: https://www.trexglobal.com/tax_defer