Real-Estate Investing, Exchange Expenses, and Tax Benefits
All investments come with some a bust or bring a windfall? While some investments are wiser than others, one that is almost always a smart choice is real estate. If you choose to invest in real estate, down the road you may decide to reinvest your profit into a larger investment through more real estate holdings. But what about the tax impact? Capital gains taxes come with a large bill, and who wants to give up their hard-earned money for that? Smart investors know that there’s a way around this tax: a 1031 exchange.
To qualify for a 1031 exchange, an investment property must meet a list of criteria:
- The property must be held as an investment property only. It cannot be used as a residence, whether primary, secondary or as a vacation home.
- The proceeds from the sale of the original investment property must be put toward the purchase of the next investment property.
- The exchange must be for a like-kind property. While this may seem limiting, like-kind can be applied to almost any kind of real estate holding, including selling a physical home for a parcel of land.
Another advantage of a 1031 exchange is the ability to roll certain expenses into the exchange, so as to avoid a tax responsibility. Exchange expenses that are allowable include:
- Real estate agent commissions
- Closing fees
- Title searches and insurance
- Recording fees for the title
Some expenses are not allowable though and will result in a tax bill from the sale of the original investment property. These expenses include property taxes, insurance premiums, maintenance or repair costs, security deposits, and more.
While a 1031 exchange can be invaluable to avoid a costly tax bill on the sale of an investment property, it is also a complex financial tool that requires a keen awareness of the tax code requirements. When considering a 1031 exchange, it is critical to speak to an exchange expert as your first step.
Want to understand if a 1031 exchange is right for you? Contact Clear Title to speak with one of our real estate professionals.
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