Tax Deferred Exchange – What You Should Know

Real estate transactions are far more complex than simply transferring property from a seller to a buyer. While many actual people are involved in a successful real estate transaction like attorneys, real estate agents and buyers and sellers, taxes are another important component in the process that shouldn’t be forgotten. As a seller, any money received during the sale of your property above and beyond what you originally paid for it is assessed a tax that you must pay.

What happens, though, if you want to purchase another property very close in time to when you sold your last home? When such a situation arises there is an option to defer paying taxes that is offered by the federal government. This is where the 1031 exchange, also known as a tax deferred exchange, comes in.

If you’re considering selling your home and subsequently purchasing another home within a specific time period, a 1031 exchange is a simple means to do just that. In order to be qualified, the Internal Revenue Service, or IRS, sets certain guidelines that must first be met by both pieces of property.

The 1031 exchange is favored as much as it is due to the convenience of knowing the way you sell and purchase property under its framework is by and large the same as how you would do so in an ordinary real estate transaction. As its name suggests, the 1031 exchange is treated as an exchange of property instead of a typical sale, making it distinctive. A deferred gain treatment can be qualified for as a result, based on federal laws. Put more simply, the IRS does not consider 1031 exchanges taxable in the same way that it does regular home sales.

Savvy homeowners can consequently save money by using a 1031 exchange when they want to sell their current home and quickly purchase another. It is important to note that time constraints must be met in order for the “exchange” to qualify under the 1031 IRS tax code. To qualify, the IRS additionally has stipulated that the subsequent home purchase must be of “like kind” to the original property owned by the homeowner and also be purchased for productive use. You should consult a tax specialist to ultimately have all of the specifics explained.

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