Investing in real estate can boost your bottom line by providing passive income. However, real estate investors also face hefty tax burdens when selling properties, which can eat away at their finances. Using a Section 1031 exchange instead of selling allows you to defer taxes as you build wealth, which is ideal for ambitious investors. This guide explains this process so that you can make an informed decision. 

A Guide to Section 1031 Exchanges for Real Estate Investors

What are 1031 exchanges?

1031 exchanges derive their name from Section 1031 of the Internal Revenue Code. Instead of spending the funds gained from selling an investment property, you can use them to reinvest in another piece of real estate. This new investment isn't taxed as it would be if you simply sold the property and pocketed the earnings for personal use. 

If you want to take part in an exchange, you must provide the proceeds to an agent, who will keep them until they're invested in a new property. This agent must hold the position of a qualified intermediary for the exchange to be legitimate. 

Who can take advantage of tax deferment?

Anyone can take advantage of tax deferment as long as they take the proper steps and invest in an eligible property. Along with individual investors, this also includes trusts, LLCs, partnerships, and corporations. 

Which properties are eligible?

Properties involved in the exchange can't be for personal use. The new investment property must also be of equal or greater value to the previous one. 

While other types of property, such as vehicles, are eligible for 1031 exchanges, you can't exchange real estate for personal property. The exchange must be like-kind for it to be exempt from taxation.

How quickly must properties be sold?

You must provide your qualified intermediary information on a replacement property within 45 days of the sale of the previous investment property. From there, you must purchase the new property within 180 days of selling the previous one or within 180 days of the tax return deadline for the year the property was sold. 

Investing in real estate is often complex, but Wealth Agents will help you navigate the process. Based in the metropolitan St. Louis area of Missouri, these professionals help real estate investors nationwide make sense of tax issues through clear instruction and training. Visit the website to learn more about their services, or call (314) 400-8219 to speak with a knowledgeable team member today.