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Do You Know You Can Skip Paying The Capital Gains Tax?

Feb 28, 2008
If you're a real estate investor who's looking for ways to cut on costs, maybe you've heard about section 1031 of the tax code that allows you to defer payment on capital gains tax. This technique is popularly known as the 1031 Tax Deferred Exchange. It pays to know everything involving this tax code section to benefit from it fully.

Finally you there's a law-mandated benefit that says it's legal for investors to delay the payment of capital gains tax if the requirements have been followed. This is under section 1031 of the U.S. Internal Revenue Code. The number one requirement you should meet is that you should spend all the capital gains to purchase the same property.

Another condition you need to accomplish is that you must find a suitable property to exchange for the one sold within a specified amount of time, which is 120 days from the date your property is sold. After you have identified, meaning put the possible exchange property under contract, the acquisition must also be made within a specified amount of time from the date of identification - extension is not allowed. You should also know that the exchange property could not be a house you want to buy for self-use.

A lawyer or an intermediary such as a 1031 service company is also needed to facilitate the process. Hiring the service of these people is also another condition to qualify for 1031 exchange. These people will facilitate the papers and the contracts involved in the process. For instance, the intermediary is tasked to handle the capital gain for your, purchase the exchange property, and transfer the ownership to you.

You must also remember to be explicit in your contract from the very beginning. From your contract to sell to your contract to purchase, you must state clearly that you want to evoke your right to avail for 1031 tax deferred exchange. Preparing the written papers is part and partial job of your lawyer or your intermediary.

The IRS has five types of 1031 exchange available such as the simultaneous, delayed, build-to-suit, reverse, and personal property. The most common in real estate investing is the delayed type, which is the one, explained in this article. It is called the delayed type because there's a time delay allowed from the sale of the property to the purchase of the exchange property.

The number one benefit of applying for 1031 exchange is that you could postpone your capital gains tax payment. You'll only pay until you make the final sale of your property or if you can't find a property to exchange within the time allowed - this is highly unlikely. In the times when investors need to cut costs as much as possible, availing for a 1031 exchange is really a big help.

This privilege is provided by law under the tax code section 1031 and all real estate investors are eligible to apply. No matter if you're a small company or a starting individual, you can always be granted with the privilege provided that all the requirements are met.
About the Author
About the author: Jack Cockrel is a real estate investor based in Atlanta, Georgia. He has made more than 750 real estate transactions since 1996. For Real Estate Investing Tips get his free course Real Estate Investing Free Course.
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