Many people ask me questions along the lines of: "over the years I have invested a large amount of money into an investment property. How does this affect my taxes if I sell the property or if I die?"
First, I would like to talk about the sale vs. 1031 exchange part of the question, and then I would like to go into the ramifications of dying while owning the property.
Selling ~ The 1031 Question
Section 1031 is a very taxpayer-friendly provision of the internal revenue code. It gives you a way to sell your investment property without having to recognize the gains. This defers your taxes indefinitely…perhaps forever.
There are some rules and regulations that you must follow in order to get this tax deferral. One of the key rules is that your property must have been held for investment or for use in your trade or business. Watch the video below for more information on this:
The other major requirement is that you have to re-invest your proceeds into like-kind property. If you have watched the video above then you have probably picked up that certain property held for investment can be exchanged for certain other like-kind properties that will be held for investment.
In a delayed exchange using a qualified intermediary, your proceeds from the sale must be invested in a like kind property within 180 days of the sale. Also, your replacement property must be identified within the first 45 days.
Remember, 1031 exchanges are governed under the United States Tax Code which specifies that if an asset (such as a collector coins, real estate, business equipment, aircraft, race horses or agricultural equipment) is sold, and the proceeds of the sale are then reinvested in an asset of a like-kind, then no capital gain or loss are recognized. This allows the deferment of capital gains taxes that would otherwise have been due on the first sale.
Remember, both your relinquished property and your new replacement property must be held either for investment or for productive use in a trade or business.
Why is a 1031 Tax Exchange Good For You?
The key benefit is that your capital gains tax liability that would otherwise become due is deferred under Section 1031 of the code. The main value to investors is that as long as your money continues to be re-invested (over and over again) in other qualifying like-kind property, your portfolio can continue to grow in value (without taxation). You can use the money that would otherwise go to the government in taxes to buy more replacement property, allowing you to buy more and bigger properties. Over time this tax-free compounding has a tremendous wealth building power.
- 1031 Hotline: If you have questions about the time value of money and Minnesota 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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