Capital Gains Tax Deferred | 1031 Exchange Tax Planning

When you sell rental property you will probably owe a 15% tax on the capital gain and a 25% tax on the depreciation recapture.

You can defer the tax payments by doing a 1031 Exchange, in which your investment sale proceeds are reinvested into another investment property.

A 1031 Exchange permits investment property owners to sell a property and defer tax payments by reinvesting the proceeds into a “like-kind” investment property or properties.

In order to completely defer the capital gains taxes with your Like Kind 1031 Exchange, the replacement property must be of equal or greater value, and all the equity from the sold investment property must be reinvested in the new investment.

Other requirements of 1031 Exchanges include Qualified Intermediaries and Time Limits. The IRS mandates that a Qualified Intermediary must handle the transaction, process all the paperwork, and be in direct receipt of the funds from the sale until it is transferred to the closing agent for the new investment property.

After closing the sale on the old investment property, an investor must identify three potential exchange properties within 45 days, and must close on one exchange property within 180 days in order to complete their 1031 Exchange.

Try our property management software when you’re done with your 1031 tax exchange!

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This entry was posted on Monday, December 1st, 2008 at 12:01 am and is filed under 1031 Exchange. You can follow any responses to this entry through the RSS 2.0 feed.