![]() You’ve had a tenant living there for the past year, but now you want to sell it and buy another rental property. However, you could swap a former primary residence or vacation home under very specific conditions.įor example, let’s say you have a lake house that you decided to turn into a rental property. Just a side note: 1031 exchanges do not apply to primary residences. Boo! Thanks to the 1031 exchange, you can reinvest the profits into another investment property (that costs the same or greater than the property you just sold) and avoid paying those taxes altogether. If your long-term capital gains tax rate is 20%, that means you’d owe $60,000 on the sale of that property. Not too shabby!Ĭonnect with an investing pro who gets this stuff. During that time, the property’s value went way, way up and you sold it this year for a $300,000 profit (after any commissions or closing costs paid). So let’s say you bought a real estate property five years ago. As long as you replace one investment property with another and follow all the rules set by Uncle Sam (we’ll get to all of those in a minute), you can keep kicking that tax bill down the road.īut how exactly does this century-old tax loophole work? Let’s dive right into it! What Is a 1031 Exchange?īasically, a 1031 exchange allows you to avoid paying capital gains tax when you sell an investment real estate property if you reinvest your profits into another similar property within a certain period of time. Why? Because for about 100 years, the 1031 exchange has allowed real estate investors the chance to reinvest the profits from the sale of a property without having to pay capital gains tax. Internal Revenue Code-is your best friend! Stay up to date on the 1031 exchange industry, sign up for updates here.If you’re a real estate investor, the 1031 exchange-which gets its name from Section 1031 of the U.S. Want to get started with your exchange? Start yours here. Have additional questions for us? Ask your question here. If you would like to set up a 1031 exchange or have any questions, please contact us at First American Exchange. The first step is to talk to your tax advisor. This article only mentions the highlights of this structure. It also may give the investor more diversification, since the REIT typically owns many more properties than what the investor owned.Īlthough REIT shares cannot be traded for real estate in a 1031 exchange, contributing real estate to an UPREIT is another option, provided the REIT is interested in acquiring your properties. This allows an investor to spread out the tax liability or in some cases hold onto the units so that his or her heirs can inherit them at a step up in basis. Eventually you can convert those OP Units to cash or REIT shares, although when you do so, it will likely be a taxable event. Now you own OP Units which give you the right to receive cash flow that is equivalent to owning shares of the REIT stock. This transaction can be structured to be tax deferred under IRC Section 721. If the REIT is interested in buying your real estate, you can contribute the real estate to the UPREIT in exchange for operating units (OP Units) of the UPREIT. Some REITs own their real estate in an UPREIT or umbrella partnership. Not only are shares of stock personal property and therefore not like kind to real property, but Section 1031 specifically states that stock cannot be traded in a 1031 exchange. Investors who invest in REITs own shares of stock and do not own the real estate directly. ![]() While this is not true, there is another strategy that allows investors to trade their real estate into a REIT partnership in a manner that is tax deferred.Īre REIT shares like kind to real estate?Ī REIT is an entity similar to a mutual fund that owns real estate and is not taxed at the corporate level. Many real estate investors have heard that it’s possible to trade real estate into a REIT using a 1031 exchange.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |