Only two things in life are certain: death and taxes. Death is impossible to avoid, but I’m going to let you in on a little secret; you may be able to defer paying taxes on the sale of real property that is used as an investment. There are very specific rules governing how an individual is able to defer paying taxes on real estate transactions, but with the help of the experienced real estate attorneys at Johnston Tomei Lenczycki & Goldberg, LLC, you may be able to take advantage of what is known as a 1031 exchange.
What is a 1031 Exchange?
A 1031 exchange is aptly named after the section of the Internal Revenue Code that establishes the rule. § 1031(a)(1) of the IRC states, “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.” This means that an individual may defer paying capital gain taxes when he sells an investment property and reinvests the proceeds in another property for investment.
Basic 1031 Rules
All 1031 exchanges for real property must be of like-kind. This means that the property being sold must be of a like-kind to the property being purchased. Although this sounds like a very limiting rule, the term like-kind is broadly construed. Like-kind simply means property that is of similar nature, not of similar value, i.e., real property for real property.
Another criterion that must be met in order to complete a successful 1031 exchange is that the property being purchased must be of equal or greater value to the property that is being sold.
A limiting rule on 1031 exchanges is that 1031 exchanges apply only to investment properties; an individual may not swap primary residences.
Benefits to a 1031 Exchange
There are many benefits to a 1031 exchange for real property. The most significant benefit is the deferment of paying capital gains taxes. At some point an investor will sell his property and have to pay taxes, but by utilizing 1031 exchanges, an investor will only have to pay those taxes once. Moreover, there is no limit to the amount of times or how frequently an individual may take advantage of a 1031 exchange.
Another benefit to a 1031 exchange is that they offer investors freedom. An individual can diversify his or her investments or change his or her type of investments willingly with a 1031 exchange. Since the like-kind parameter is broadly construed, investors can switch up their investment options. Consider an investor who is currently renting a high-maintenance single-family home to a tenant. Using a 1031 exchange he or she is able to sell the single-family home and invest in an apartment complex with a managing company. Now he or she will have a low-maintenance property which will (hopefully) make him or her more money.
In a 1031 exchange, a seller of real property is also eligible to purchase multiple properties with the money acquired from the sale. The same is true for individuals looking to sell multiple, smaller properties, and purchase a single, larger property.
An individual’s freedom to invest is surprisingly vast, and there are many ways to accomplish diversifying investments by using 1031 exchanges. Let the 1031 exchange attorneys at Johnston Tomei Lenczycki & Goldberg, LLC help you accomplish your investing goals. Whether you’re looking to diversify investments, or capitalize on a potential investment opportunity, we’re here to help. Our accomplished attorneys will inform you about all the ins-and-outs of 1031 exchanges, as well as help streamline the process of selling and buying investment property. Why pay taxes when you don’t have to? Get in touch with the experienced Libertyville real estate attorneys at Johnston Tomei Lenczycki & Goldberg, LLC to find out what a 1031 exchange can do for you.
Phone Number: (847) 549-0600
Fax Number: (847) 589-2263
350 N. Milwaukee Ave., Ste. 202
Libertyville, IL 60048
223 N. IL. Rt. 21, Ste. 14
Gurnee, Illinois 60031