How to do a successful 1031 Exchange ? by Angilina Taylor

The 1031 exchange is a way for owners and investors to defer capital gains tax when selling an asset. This is one of the more complicated transactions to successfully complete, especially now that the tax code has changed. This article will help you know how 1031 exchanges work and what can be done to maximize the efficiency of the exchange.

The Basics of a 1031 Exchange

A 1031 exchange occurs when an investor sells an appreciated property and simultaneously purchases property of the same value. When the investor completes a 1031 exchange, they are exempted from paying capital gains taxes.

Below mentioned are the few basic rules that investors need to know for a 1031 exchange.

The home cannot be a primary residence.
The investor has a 45 days period to name a replacement property.
There are ways for homes to still be taxed.

When to Choose 1031 Exchange

Most people will choose a 1031 exchange when their second home or vacation home has increased strongly in value. Capital gains are added to a person's income for that year, and if they're high enough, the gains can quickly push an owner into the next tax bracket. When capital gains tax can take up 20% of the total gains, this is a substantial enough charge that owners may want to avoid.

For example, a homeowner purchase a vacation home for $150,000, and it sells for $645,000 five years later. After all, taxes and fees are deducted, it results in capital gains of $450,000. If the owner pays full tax for the home, they would be giving $90,000 to the government.

1031 exchanges are often popular among serial investors because of their relative flexibility. Not only are there no limits to how many times a person can complete 1031, but property owners are welcome to purchase any type of property they choose.

What to Know

The investors still need to pay their capital gains tax eventually if they ever choose to sell their appreciated property without buying a new property of the same value. In addition, some people may still have to pay taxes even if they do choose a 1031 exchange, in the form of a depreciation recapture gain. This occurred when the IRS taxes total depreciation claimed as additional income. This clause is rarely invoked by the IRS for a property sale and only applies if the sale price exceeds the adjusted cost basis.

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