As professional Lancaster property managers, we get a lot of questions from investors who are interested in maximizing their returns and protecting their wealth. One of the best ways to do that is with a 1031 exchange. This program allows property owners to avoid paying capital gains taxes by reinvesting earnings from the sale of real estate.
When you can hold onto the gains from selling your property, it means more money and a more effective investment strategy. If you’re thinking about this for your own investment portfolio, there are a few things you need to know.
What are the Benefits of a 1031 Exchange?
When you sell a piece of property, you are required to pay taxes on the money that you earn from the sale. One of the ways to defer those taxes is to buy a new property – or several properties – that are similar to the one you’re selling. By similar, the tax code means income producing. You cannot sell the home you’re living in and buy a few apartment buildings. You have to exchange one rental property for another.
It’s a good idea when you know you’ll have a large tax exposure from the sale of your investment property. The 1031 exchange is also a good idea if you have an older home that requires a lot of maintenance and attention. You can sell that home and reinvest in a newer property to save money on repairs.
Lancaster Property Management: Steps to Deferring Taxes
There are a few things you need to do when successfully executing a 1031 exchange:
- Ensure you have a qualifying investment property.
- Choose a new property that has the same or a higher value than the original property. If you walk away from the exchange with any proceeds, they will be taxable.
- Find one property, two properties, or three to exchange with your current property.
- Follow all timelines. Investors must identify a replacement property within 45 days of selling the original property. Then, you have 180 days to close on the new sale.
- Use an intermediary and don’t take any of the cash from the sale of your property. The intermediary will hold your funds until they can be reinvested in your new purchase.
Lancaster Property Management Advice: 1031 Exchanges Shelter Wealth
The 1031 exchange is one good way to keep all of the money you earn off the sale of an investment. Remember this isn’t a tax-free situation. You are technically deferring the payment of your taxes. However, there is currently nothing that prevents you from doing 1031 exchanges several times over. So, it’s conceivable that you’ll be able to avoid paying those capital gains taxes completely. If you plan ahead, you can leave the property to your heirs after you pass away, and then a step-up is awarded, which allows the beneficiary to avoid paying all of those deferred taxes.
If you have any questions about how to take advantage of tax benefits, or you need help with a 1031 exchange, please contact us at Fetch Home Management. We’re happy to provide investment advice and resources for all of your Lancaster property management needs.