Filing Taxes Properly

A like-kind exchange, referred to by the IRS as a 1031 exchange due to the section of the tax code that covers it typically allows someone to defer taxes on the capital gains from selling a piece of property as long as they are using the proceeds to purchase another similar piece of property. This capital gains loophole can be quite beneficial if you know how to use it but the 1031 exchange rules can be complex. Here's a basic overview of what a 1031 exchange allows you to do and why you will want a professional to assist you with this process.

Covers Real Estate But Other Things As Well

The most common use of the 1031 exchange is when you are selling one piece of real estate and then buying another property in short order. This could be advantageous to your business if you want to move into a bigger building, for example.

But 1031 also covers other forms of property besides real estate. If you are selling some of your equipment but then using the proceeds to purchase new equipment, the same rule might apply if you were able to sell your old equipment at a profit.

Defer Taxes to Have More to Invest

The reason the 1031 exchange is so beloved by businesses and investors is that it lets you have more money upfront to reinvest into whatever you are buying next. You can defer your capital gains tax and use the full amount you got from selling your property to buy the next big thing. It means you'll have more cash on hand for right now and that might make a big difference.

Grow Faster By Getting What You Need Now

Because of the extra cash you will be allowed to hold onto, you might be able to get something better than you would otherwise. You can get even better equipment or a piece of real estate with ideal features for your business, all in an effort to keep your business growing at a fast pace. With a little luck and some hard work, you can turn the "extra" stuff you are getting into even faster growth for your company.

Timeframe Considerations

1031 rules can be complex and there are guidelines to follow and be mindful of. As an example, you may be expected to purchase the new piece of property within 180 days in order for the 1031 to apply. 

You Need an Expert

To ensure you meet all deadlines like the one mentioned above and to ensure that you will qualify at the end of the tax year to take advantage of the 1031 exchange, you need to hire a tax expert before and not after you begin this process. You don't want to get to tax season and find that you actually owe more money to the IRS because your transactions did not qualify.

For more information on 1031 exchange rules, contact a local tax professional.