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As a large property owner or real estate investor, you might be familiar with 1031 exchanges. As a newcomer to investing, or as someone who is preparing to sell a long-held piece of real estate, you might not be. Either way, it’s important to understand the opportunities a 1031 exchange can offer you during your next real estate transaction, and you should consider taking action quickly. President Biden’s new tax proposal dissolves the possibility of deferring taxes on property gains over $500,000.
Simply, it’s a process that allows you to sell an investment property (the key word here being investment) and then roll the proceeds into the purchase of a new investment property, preferably of equal or greater value, to defer all capital gains taxes.
If you plan to take advantage of a 1031 exchange, it’s important to understand which types of properties and transactions are eligible. Your property must be an investment property; 1031 exchanges do not apply to primary personal residences. Investment properties are real estate purchases used to generate profit, such as office buildings, ranches, farms or rentals. If you’re looking to fully defer the tax ramifications of the sale, you’ll need to roll the money into the sale of a property that is of equal or greater value than the one you’re selling. This isn’t a requirement, but using the money to purchase property that costs less than the original will leave some tax exposure.
There are specific steps you must take in order to take full advantage of the 1031 exchange tax deferment and it’s important to note that timing is paramount.