A like-kind exchange lets you defer capital gains taxes.
Being a real estate investor, you must be aware of the capital gains taxes an investor needs to pay upon selling an investment property. Though for small investments, this capital gains tax may not rob you significantly, however as the selling price of the property increases, taxes owed on it also rise by leaps and bounds. To help investors save capital gains taxes, the IRS had introduced Section 1031.
1031 Like-Kind Exchanges –
A like-kind exchange, or what is commonly known as a 1031 exchange, is a tax-deferring strategy using which you can defer capital gains taxes owed on the sale of their investment property. When you sell an investment property as part of a 1031 exchange strategy, you are not liable to pay taxes on your capital gains. Isn’t it great?
Three Major Requirements Of A Like-kind Exchange –
To qualify for a like-kind exchange, you must satisfy three financial requirements, besides other rules of this unique tax-deferred exchange.
- The cost price of the replacement property must be equal to or greater than the selling price of the relinquished property. If you sell a duplex for $350,000, you must acquire replacement property of the same or higher amount.
- The replacement property must have the same debt as the relinquished property. You cannot go debt-free on your replacement property if there is any debt on the relinquished property.
- You must have the same equity in the relinquished and replacement properties. Say, you sold a $600,000 property with a $350,000 mortgage and bought a property worth $800,000 with a $600,000 mortgage. In this case, you comply with the first two rules, but your equity in the property declined from $250,000 to $200,000 as part of the exchange.
Finding ideal 1031 exchange properties for sale could be a tricky job. There are very limited places where you can get high performing 1031 properties. Look out for some real estate websites and go through the listed properties.
DSTs and TICs serve as alternatives to replacement properties.
What if you fail to identify a replacement property before the deadline? There are many cases when investors have been unable to identify property within the specified time. There could be various reasons – the seller refused to sell the property, somebody else bought it before you, and so on. To get rid of the property identification process in a 1031 exchange, you can invest in DSTs or TICs.
A Delaware Statutory Trust, long for DST, is a private governing trust that owns, manages, and sells investment properties. By opting for DST 1031 investments, you buy shared ownership in one of the DST properties. The IRS sees it as a real estate investment and accepts a DST investment as a 1031 exchange replacement property. That’s it. You saved your 1031 exchange without getting on the street and hunting for investment properties.
Compare different DST options today, and close your 1031 exchange before it’s too late.