Learn how to do a 1031 exchange
When you sell a property for business purposes for a bigger value that you paid when acquiring it, you make a profit and this profit is subject to taxation. The fact is that capital gains tax can run as high as 30%, so you should do everything in your power to avoid a loss of this kind. Don’t know how to? To save money on taxes when buying and selling real estate, do a 1031 exchange. Section 1031 of the Internal Revenue Code allows businesspeople to defer capital gains taxes. As a matter of fact, this strategy is largely used across Delaware. If you don’t know where to begin, keep on reading.
Hire a Professional to Help You
When conducting a 1031 tax-deferred exchange, it’s better to have a professional by your side. To sell a business property and replace it with a like-kind one, you have to go through all the complexities of the Internal Revenue Code. As you can imagine, there is no room for finding answers by guessing. What you should do is get the help of a professional. A specialist, like a tax specialist, an accountant, or an accountant, will help you save tax dollars. Yu will not have to worry about documentation or other things.
Determine What Qualifies For the Exchange
Now that you have an expert by your side, figure out what type of property qualifies for the 1031 exchange. You have to trade a property for another one of the same value. In other words, you can only exchange like-kind properties. You cannot give up a personal residence. The asset must be a business-type asset. For instance, you can give an office and take a shopping center. If the properties are not of the same type, the exchange is not tax free. What is more, the property has to be yours.
Sell the Relinquished Property and Purchase Replacement Property
If you choose a simultaneous exchange, you can make the swap on the same day. However, it’s preferable to opt for a delayed exchanged. This type of trade will buy you more time. You find a buyer for the real estate asset and within a certain amount of time, you will start looking for a replacement. As soon as you can, find someone who is willing to purchase your property. Once you have found a prospective buyer, find a replacement property. To be on the safe side, identify three assets. This will serve as a backup plan.
File IRS Form 8824
The last thing to do is to after you complete the exchange is to inform the IRS about the trade. You will do this via the Form 8824 that figures the amount of deferred capital gains tax. You will have to provide descriptions of both properties, give an account of your relationship with the other party, mention gain and loss, how much cash you received and the list goes on. To get your hands on this form is very simple. Go to the IRS’s website and download it.