There’s a way to swap one asset for another without paying taxes. Before you get too excited, this is a pretty specialized transaction with a lot of limitations and considerations.
It’s called a 1031 exchange and it can only be used to do a like-kind exchange for one business or investment asset for another. If done the right way, there is no tax. We at Tauber Law Offices are doing these transactions more and more for our clients. It’s one rather creative way to grow an investment tax-deferred.
Consider the fact that capital gains tax on your profits could be as high as 15% to 30% when state and federal taxes are combined. This is why the 1031 exchange is a great alternative for some investors. Those deferred taxes could leave you money left over to use for the future.
A 1031 exchange must be done properly in order to roll over your profit from one piece of investment real estate to another. Right now, there is no limit on the number of times you can do this. However, there is a movement in Washington to put some more restrictions on these types of transactions. So it might be wise to move forward soon to reap all of the benefits available.
For one thing, the Obama Administration would like to cap the amount of gains deferred under section 1031 and to limit the amount of capital gain deferred under section 1031 to $1 million per taxpayer per taxable year. The proposal would be effective for like-kind real and personal property exchanges completed after December 31, 2016.
Let’s mention some other important things to remember when considering a 1031 swap.
This is for investment and business assets only. You cannot swap your primary home for another.
Sometimes personal property qualifies, such as a rare art piece or other valuable collections, for instance. The Obama proposal, however, would try to exclude this provision.
The exchange is not always immediate. It can be delayed up to 45 days when you must specify the property you want to acquire. Meanwhile the cash is kept in escrow.
Once you choose the property, you have 180 days to close, less the number of days it takes for you to make that designation.
There are many other things to think about. Cash that remains after the 180 days is considered a capital gain. You also must think about mortgage loans or other expenses connected to the property which would be your responsibility – with tax ramifications.
Years ago, a real estate swap had to be for a very similar type of property. Those rules are now relaxed. For example, you can now exchange land for a building, or a strip mall in exchange for a warehouse.
What we are describing here is a very simplistic explanation of the concept. All transactions are different and there are strict requirements and time limits that must be adhered to in order to take advantage of the tax benefit. Do it wrong, and you could be liable for a lot of tax money.
We at Tauber Law Offices have the experience to help you do a 1031 Exchange properly. This is not something that normally should be attempted yourself. Let us help. Our initial consultation is free. Contact us today.