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Last Updated: May 14th, 2012 - 22:24:01 |
The Internal Revenue Code Section 1031 allows your investment real estate to roll the increase from the old Investment Property’s sale over to the new Investment property with no paying of taxes. If you meet there requirements, you could sell your dilapidating duplex and buy yourself a new apartment building, or a warehouse, an office building, or even bare land. You are not required to hold the mortgage loan on another duplex.
Any rental Investment Property might always be swapped over for any different rental property. So you would use asset management to sell your rental duplex and purchase a low rate mortgage on that new office building. Bare land investment is almost always considered investment real estate and might be switched over for your rental investment property or visa-versa. Even if you are only trying to rent the property, yet in a year and a day later, it sells, the transaction still qualifies for that Internal Revenue 1031 Tax Deferred Exchange.
Understand, the term "used as a business or trade, or held as an investment." To begin with, it does not signify use as your personal residence. You are not living there. And it should not represent property detained for resale. A principal instance of a property detained for investment, would be the one you own to rent, such as that duplex.
If you have receipts of renters living there, maybe even carrying their own renter's insurance, then you have your proof for the IRS Tax allowance. Otherwise, hang on to prior client showings receipts for proof that you made rental attempts just in case your local IRS office audits you with questions as to your motives for buying the property.
What is some other Investment real estate that qualifies? Property used in a business or trade. For instance, if you take a California home loan to own the building and land that house your own real estate business, that property qualifies for the 1031 exchange. Likewise, if you are a Realtor but operate in your home’s office even if you get a home improvement mortgage to build it; that office, still is property used in a business or trade and can be qualified in a switch when you do sell your house.
However, your bedroom renovated with a refinanced adjustable mortgage and the other parts of your personal residence do not qualify for use in the 1031 exchange. Nor does "property you held for resale," even if it was for a real estate franchise.
But what is property that you held for resale? Some primary cases are "fix & flips," those unattractive properties that you pay money for, get home improvement financing to fix up, and then sell on the market in just a few months. Because these Investment homes are purchased for immediate resale, they should not qualify for the 1031 exchange.
Does this indicate that you can never buy and fix up ugly Investment Properties, and qualify for an exchange? No, it does not. Good News! You can use a 1031 exchange for "fix and flips," however you must hold them for a qualified time period. Typically, this holding period extends for at least one year and one day. The chief reason is because the IRS hates for you to make any short-term capital gains, typically taxed at higher tax rate, and instead claim them to be long-term capital gains, which are usually taxed at a much lower rate. .
The government is trying to prevent investors from doing a string of short-term buy and sells or "fix and flips" to qualify for the 1031 exchanges. And then, these investors decide quite a few years later to quit the game, sell the last property, and claim a long-term using capital gain treatment just because the whole plot, from their first bought and sold property to their last, had extended longer than the one year.
Remember also that both your old property and your new property have to be inside the United States. And you can sell one older property and acquire several fresh properties. Or you might sell multiple old properties to buy one newer property. Bear in mind, however, numerous property transactions still must meet the IRS’s 45-day and their 180-day time structure requirements. For further clarification, if you are still unsure about of these terms or conditions, be sure to contact a real estate lawyer
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