It's typically expected that when you sell property at a profit, you will file capital gains tax for that profit. The net profit that you get from the sale, therefore, determines how much tax you will pay. If you are the type of investor that sells a property to invest in other property, this arrangement can ruin business for you because it may lower your profit margins. However, section 1031 allows you to defer taxes for your property sale as long as you are investing the money into another property purchase.
However, the IRS has rules and regulations that govern how you defer these taxes. Here are some important things you need to know about property 1031 Tax Delayed Exchanges.
Do You Need a Third Party to File?
Section 1031 dictates that all proceeds that you get from selling property should be taxed. It is, therefore, illegal to keep them to yourself. However, if you are a house flipper, or you want to invest in another property, the IRS allows you to give the money to a qualified third party to hold for you. This third party will hold these untaxed proceeds and transfer them to the seller of the new property that you are interested in when the time comes for you to buy the new property.
This means that you have to find someone who is qualified and willing to hold your funds until you are ready for the new purchase before you can qualify for a 1031 tax delayed exchange.
When Are You Allowed to File?
The law allows you to file for delayed taxes under very special circumstances. You are only allowed to file if you are looking for a property that has prospects for returns other than your current one, when you want to consolidate several properties into one, and when you want to invest in managed property. It is also possible to defer when you want to undo the financial damage occasioned by depreciation.
Do You Need a Tax Professional to Guide You?
The best person to help you get the right assistance with property 1031 Tax Delayed Exchanges are tax professionals. They will assess your property and your investment goals, and help you determine the best way to handle the program.
Remember that the most important thing is to hire a professional who understands property tax. They will help you save some of the money and re-invest it without creating issues with the IRS. Contact a rental property 1031 tax exchange service for more information.