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Whether you are investing in the stock market, real property, or buying gold, there is a continual challenge of when and how to invest because of the fluctuations of current world events and economics. Buying and selling real estate can usually weather many changes. Although short-term turnovers in real estate can be profitable, investors normally realize large gains over longer periods and the general purpose for holding property is to have tax benefits while gaining appreciation.
There are times when real property tax benefits decrease over a period of years or the equity is large enough to reinvest in another property or even multiple ones. Then, the 1031-exchange becomes an invaluable tool for the investor who wants to trade or increase their portfolio.
The basic reason for using this particular tool is that it can be a good way to “postpone” capital gains taxes on your real estate investments. However, there are definite rules for using a 1031 exchange during the buying and selling of real property and you must follow them to qualify for this type of transaction. Here are some of the basic guidelines.
Exchanges are complicated and this article only outlines some of the major points of a 1031 exchange. Use professionals who know the requirements, as well as the pitfalls, for this type of transaction. The exchange is a great tool, but if not followed correctly, the IRS could deny the exchange, causing serious tax consequences. In addition, before considering a 1031 Exchange, consult your tax advisor to see if this will benefit your investments and taxes.
The 1031 exchange may be the tool for you. Call us if you have questions on the 1031 exchange and we will be happy to assist you.