It’s that time of year again, tax season is upon us. I thought it would be appropriate to remind my readers both old and new about 1031 exchanges and how it can help defer paying capital gains tax.
Simply put the Internal Revenue Code on 1031 allows real estate investors to reinvest the proceeds of a sale from one investment property into another of equal or greater value. Thus, being able to defer capital gains taxes on the sale of your investment property.
- Section 1031, in place since 1921, allows investors to defer paying capital gains taxes on the sale of investment property as long as the proceeds are invested into a similar (“like-kind”) property.
- Some policymakers and politicians view 1031 exchanges as a way for large investors to dodge taxes rather than defer them, but such claims fail to recognize that most participants are “mom and pop” investors and the transactions rarely lead to a permanent tax deferral.
- A high percentage of like-kind exchanges, as many as 88%, ultimately result in taxable sales. Removing 1031 exchanges entirely would reduce federal revenue and reduce other related economic activities.
There are some basic principles you should be aware of:
1.The properties involved be like-kind. In other words, if you sell a brownstone apartment building in Boston’s Back Bay you can’t use those proceeds and buy a single-family home in Lexington, Massachusetts.
2.You must complete the exchange within a specific period. Once you put your proceeds into escrow you have only 180 days to complete the exchange or you’ll be subject to fines or have tax consequences.
3.You must identify your next property that your buying within 45 days. Once your money is placed in escrow you only have 45 days to identify the next property you’ll be buying.
If you would like more information on Boston real estate and 1031 Exchanges please feel free to contact me at 617-595-3712.
For more information on how to be a Boston condo owner please contact John Ford at 617-720-5454. You can also email at email@example.com
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