You know the old adage: “Nothing is certain but death and taxes.”
Well, that’s not always the case. I can help you minimize some of those taxes by taking advantage of Internal Revenue Code Section 1031, which lets you postpone paying tax on the capital gain from investment property — if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.
That may sound complicated. But with the right advice and proper structuring, you can maximize your returns and minimize your taxes. Here’s what you need to know.
Tax Law Changes
The new tax law reform preserved this option, but with some changes to what qualifies.
The law still allows real estate owners to defer the tax gains from the sale of business or investment property and reinvest those proceeds into another commercial property. But personal property — such as machinery, equipment, vehicles, artwork, collectibles, patents and intangible assets — will no longer qualify under the new tax law.
Keep in mind that gain deferred in a like-kind exchange under Section 1031 is tax-deferred, but it’s not tax-free.
All of this hinges on what is known as “like-kind” property. According to the IRS, like-kind exchanges are when you swap real property that’s being used for business or held as an investment for other business or investment property that is the same type — which is where the term “like-kind” comes in.
Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality and regardless of whether they’re improved or unimproved. The property must be located in the United States
Here are some examples of swaps that could qualify as like-kind under Section 1031:
- An office building in exchange for a shopping center
- A shopping center in exchange for land
- Land in exchange for an industrial building
- An apartment building in exchange for an industrial building
8 Steps to Follow
The website Fit Small Business, which helps small businesses navigate tax laws and other issues, has put together a guide to Section 1031 that explains the process for using like-kind exchanges. It applies to both business owners and real estate investors.
The property must qualify as like-kind. But there also are specific time limits involved in the exchange.
Here are the eight steps:
- Sell the investment property.
- Give the capital gains to a qualified intermediary.
- Identify a like-kind property within 45 days.
- Send a duty letter to your qualified intermediary.
- Negotiate with the seller of the like-kind property.
- Agree on a sales price.
- Have your intermediary wire the capital gains to the titleholder or title company.
- Fill out IRS Form 8824.
The Washington metro area — including Northern Virginia — is one of the best areas in the country for investment property, according to Forbes. I can help you take advantage of the new tax laws and structuring your real estate portfolio carefully, so your property investments will pay off now and in the future.
Whenever you’re contemplating investing in real estate — or buying or selling a home — contact me for a free consultation. I’ve helped numerous Northern Virginia residents through the process, and I’d be happy to help you, too!
A lifelong resident of Northern Virginia and a top-producing real estate agent, Samantha Bendigo knows buying or selling a home is more than just a transaction — it’s a life-changing experience. Over the course of 14+ years, she has closed 500+ real estate transactions with over $100 million sold. Helping homebuyers and sellers throughout the Northern Virginia region, Samantha specializes in Vienna, McLean, Fairfax, Alexandria, Arlington, Prince William County, Fauquier County and Loudoun County. Email Samantha Bendigo at Virginia Luxury Homes today, or call 703-628-2420 to discover how you can start living in the home of your dreams.