Tax Advantages of Real Estate Investing
One of the reasons why Real Estate is a great way to invest is because of the “1031 Exchange.” What is the 1031 exchange? In the broadest sense, it allows your real estate investment earnings to be tax-free under certain circumstances. Basically, the earnings you receive from selling your investment properties can be tax-free, as long as you use those earnings to purchase another investment property of equal or more value. You can easily build up your equity this way, without having to pay a tax every time you sell a property. As long as you continue to do the 1031 exchange on each successive property, the accumulated tax is postponed, until you decide it is time to liquidate your investments.
In order to do the 1031 Exchange, these rules must be met:
– Both the relinquished property, the one being sold, and the replacement property, the one being bought, must be for investment purposes or used in a trade or business. The relinquished property must have also been in your possession for at least one year and one day before selling.
– After the closing of the sale of the relinquished property, you have 45 days to complete a list of properties you want to buy to replace said property.
– After the closing, you also have 180 days to close the purchase of a replacement property from the 45 days list of properties.
– You cannot touch the money in between the sale of the relinquished property and the purchase of a replacement property. Thus, an intermediary, or independent third party, must be used to handle the exchange.
– The person that holds title to the relinquished property must be the same person that takes title to the replacement property.
– To avoid all of the earnings tax, you must buy a property of equal or higher value than the one you sold, and you must reinvest all of the cash earnings from the sale.
There are few more small conditions that may apply, but these are the six main ones that will allow you to do a 1031 exchange. If you have questions or are interested in this, feel free to contact me for more information.