Selling A Rental Property: Should You Consider A 1031 Tax Exchange?
Are you planning to sell one or more of the rental properties that you currently own? If so, you may wish to consider the use of a 1031 tax delayed exchange. If you are not familiar with rental property 1031 tax delayed exchanges, reviewing the information below can help you to better understand how these tax incentives work and determine whether or not this opportunity is right for you.
What Are Rental Property 1031 Tax Delayed Exchanges?
When discussing this tax incentive, 1031 refers to the IRS code 1031. This code allows individuals to delay or defer their tax obligations when selling a rental property and purchasing a new rental property in its place. These delayed tax obligations include capital gain and income taxes which are typically due at the time a property is sold.
What Are The Benefits Of Rental Property Tax Delayed Exchanges?
There are several benefits associated with a 1031 exchange. For instance, these exchanges will maximize the amount of cash that you have on hand after selling your current property. This will allow you to make a larger investment in a nicer rental property. Not only will this increase your overall net worth, but it can also help to increase the amount of passive income that your rental properties produce each month allowing you to grow your wealth over time.
Are There Any Drawbacks To A Tax Delayed Exchange?
The main drawback to rental property 1031 tax delayed exchanges is that the time limit the IRS provides for you to purchase a replacement property is relatively short. This can become problematic if there are any issues that arise causing the closing of your new purchase to be pushed back. It is also important to note that this tax incentive is only meant to delay the taxes you owe. You will still need to pay any taxes that are owed in the future if you choose to stop making use of this property exchange opportunity.
Will I Need To Hire A Tax Lawyer Or Other Professional?
While the law does not require you to work with a tax lawyer or other qualified tax professional in order to complete a 1031 tax exchange, seeking out these professional services is in your best interest. There are a variety of rules and regulations that must be followed in order to enjoy the benefits a 1031 tax exchange offers. Working closely with a professional who has experience completing these transactions will help to ensure you are in full compliance and are therefore able to enjoy all the intended benefits.
