How Can I Get a Break on Capital Gains Taxes in Real Estate?

 Posted on September 20, 2024 in Probate Administration

Taxes are a major factor every real estate buyer and owner must consider. Property tax, also known as real estate tax, can be a financial burden on homeowners. For real estate investors, capital gains tax is an important consideration when selling property. Capital gains taxes can take a significant chunk out of the profits an investor makes from a property sale and can impact his or her ability to reinvest.

For this reason, some real estate investors take advantage of a legal loophole called a 1031 like-kind exchange. In this article, we will explore this solution and its time limits. Be sure to consult a Texas real estate attorney for more details or any questions regarding real estate transactions.

What Is a 1031 Like-Kind Exchange?

A 1031 like-kind exchange is an IRS rule that allows investors to defer capital gains tax by reinvesting the profits of a sale in a "like-kind" property. Like-kind does not mean the properties have to be the same. The IRS generally considers real properties to be like-kind, even if one is improved and another unimproved.

This means if you sell a property and use the profit from that sale to purchase another like-kind property, you can put off paying capital gains taxes on the sale revenue. For example, if you sell an apartment building and use that money to buy a strip mall, it may be considered a 1031 exchange. In that case, you would not need to pay capital gains tax until you actually receive the money.

Furthermore, there is no limit to how many 1031 exchanges you can do, so you can continually reinvest and watch your investment grow while deferring capital gains tax.

What Are the Time Limits for a 1031 Like-Kind Exchange?

The IRS does not want people to exploit this rule by letting revenue sit while claiming they will invest it in a replacement property. Therefore, 1031 exchanges are subject to certain time limits:

• An investor has 45 days from the closure of a sale to choose, or designate, a replacement property. He or she must notify the escrow of up to three designated replacement properties, one of which must be purchased. The reason the money from the sale is in escrow is because the moment the investor receives the money he or she is obligated to pay capital gains tax.
• The investor has 180 days to close on one of the designated replacement properties.

It is important to note that these timelines are concurrent, meaning you actually have only 135 days to purchase the new property after the 45 days are up.

Contact a Fort Worth, TX 1031 Exchange Lawyer

A 1031-like-kind exchange is a great way to defer capital gains tax and grow your investment without the IRS taking a bite out of your revenue. At Gonzalez Law, PLLC, we are ready to guide you through a 1031 like-kind exchange and any other real estate transaction while protecting your investment. Schedule a free consultation with a Fort Worth, TX 1031 like-kind exchange attorney by calling 817-349-7330 today.