IRS Allowed Tax Break - 1031 Exchange - Tax Break Few Use, Many Anchorage Investors Should!
by Dan Wolf
on Saturday, June 16th, 2012 at 5:47pm.
The Internal Revenue Service has a tax break that smart investors use to defer real estate tax on investment properties. This doesn't apply to the property you live in, either your primary residence or your vacation home. The tax break is for income property, rental property, investment properties - that is property held for business use.
There is a lot to the IRS Code, but the simple thing to remember is that it is possible to sell an income property and to leverage your money into a larger property and not pay the IRS as long as you follow a few specific rules fairly carefully.
Basically, when you sell an investment property, you have to sell the buyer you intend to do the 1031 exchange. Then, when the closing happens, you cannot have access to your money - your proceeds. Those dollars have to be held by a third party called an exchange facilitator. Then you have to identify your new purchase within 45 days and complete the purchase within 180 days. You have to inform the seller of that property you are doing a 1031 exchange, although it's only disclosure, it doesn't cost the seller any additional cost or time.
At the closing, the facilitator forwards your money to the closing. That's pretty much the extent of the work - not complicated at all, it only requires planning ahead and being aware of the general process.
Investors of smaller properties, say a condo, duplex or four-plex they only pay taxes on the profit or their equity. That's not exactly true. On investment properties, IRS requires the investor to take a credit called depreciation. The depreciation is credit that helps the investor at tax time, but that depreciation must be "re-captured" when the property sells. Investors should consult their accountant or CPA to talk to them about the amount of gain they have to realize at closing. Due to the deprecation, the gain could be significantly higher than the actual profit at the closing table and trigger higher taxes than you would assume.
I can put you in touch with an exchange facilitator who can guide you through the process. Smart money won't overlook the IRS benefit.