Who wants to pay more money in taxes? If you said yes, then stop reading this. I have had many clients that have made money on their property over the years and went on to pay a big tax bill, then soon after this time they bought another property.
Of course this was not the way they wanted to do it, but there is a simple way to buy another property putting all the tax differed money to use for you in buying the next property. This is call the 1031-exchange or often referred to as the like-kind exchange. It is rather simple to do, but you have to plan ahead and have a good team to assist.
Just to let you know, I am not an accountant nor do I give tax advise, because everyone has a different situation and should rely on the advice of a professional CPA. There are several things to remember when you wish to do the exchange.
- Sale of the investment property (i.e land, rental property, commercial property, etc.)
- When you have a sale then you must invest at least as much as the property your are selling. In other words you cannot by a property that cost less than the one you sold.
- You can however buy multiple properties that would add up to equal or greater than the property your sold.
- Time lines to remember. Date of closing on the SOLD property, then you have 45 days from that date to identify up to 3 replacement properties. You must close on the replacement properties with 180 days from the date of the original property closing.
Now remember the IRS does not like you to handle your tax free money, so you will have to get a 3rd party or intermediary that would take possession of the funds from your sale and this company would provide the monies to purchase the replacement property(ies).
I have had recent situations where one of my clients was able to make his third 1031-Exchange, now he started with a $250,000 rental house, which he sold and bought a commercial building at $550,000. He then sold the commercial building for a gain and bought warehouses, which in a few years sold for $700,000, he in turn used the funds from that sale to buyer then bought a multi-unit commercial building which he held for a few years. He then sold that property for $1,300,000, and from that sale he decided to buy three separate properties.
Over the years with the initial investment of $250,000 turned into $1,300,000 and the client has not paid taxes on the property but has used all his initial investment plus his appreciation to remain tax deferred and now if getting the benefit of higher income from the property.
If you are interested in letting your money and appreciation work for you as he has, let us know and we can assist with the details. If you have any questions on how we did this you can call Winston Hawkins.