How To Defer Capital Gains Tax With A 1031 Exchange

The terms of Section 1031 and the types of transactions that fall within its purview are quite intricate. These transactions require special consideration to ensure they qualify for preferential tax treatment. Therefore, before committing to a 1031 exchange, it is wise to seek the advice of competent tax and legal advisors.

If you have any questions about managing your equity holdings and wealth management, don’t hesitate to get in touch with GLP Financial Group.

If you want to keep your job, you better watch out

With a 1031 Exchange, you can avoid paying capital gains taxes on any profits made from the sale of real estate so long as you reinvest the funds from the sale into an identical or substantially similar replacement property within a certain time period.

It’s possible, though, that not all taxes owed after a sale can be postponed. The term “boot” refers to the difference in value between the properties sold and purchased in a 1031 Exchange, and it is subject to taxation if the seller “trades down” by selling an asset of higher value than the buyer’s replacement asset. Transaction costs, such those for a notary public, an attorney, and the prorated portion of property taxes can be deducted from the taxable proceeds to some extent.

Estate Planning with 1031 Exchange

1031 Exchange, a tax-deferral technique, can be utilized for estate planning. A 1031 Exchange permits real estate assets to remain tax-deferred until the owner’s death. A step-up in basis eliminates all deferred taxes up until the owner’s death, and the heirs can inherit the property tax-free.

There’s no limit on how often you can do a 1031 Exchange, so you may safeguard your heirs’ money from taxes. Even if each 1031 Exchange entails a profit, you can postpone taxes on those earnings indefinitely or until you leave these assets to your heirs and remove those taxes.

The final words

  • A 1031 Exchange might boost your wealth management. Here are some last considerations before using a 1031 Exchange.
  • A 1031 Exchange lets you invest additional cash in a replacement property by deferring taxes on sale gains.
  • 1031 Exchanges are generally confined to investment properties, although there are unique arrangements for houses and vacation homes. These trades are only authorized under certain conditions.
  • In a 1031 Exchange, you must have held the property for two years.
  • 1031 Exchanges have regulations, definitions, and time. Receiving cash from the sale disqualifies the transaction.

If you complete all the requirements, a 1031 Exchange gives favorable tax treatment.