Taxes on gains remain a thorny issue for many investors, especially in the real estate sector. The amount of money that you divert from your business in the form of taxes can add up quickly. Luckily, you don’t have to sign away your hard-earned money off to the government with every deal you make.
Thanks to the 1031 exchange provision by the IRS, you can use all your gains to grow your portfolio. Instead of the regular sale, this provision lets you trade one real estate property for another one.
However, before rushing out in search of 1031 exchange TIC properties from firms such as 1031 Exchange Place, you need to carry out your due diligence.
The IRS is watching
If the IRS is letting you off the hook for gains taxes, then you can be sure that they will make you jump through several hoops. Luckily, these hoops don’t border on herculean tasks. For starters, you must commit 100 percent of the proceeds into the replacement property.
Also, you can’t trade down a property; the replacement can only be of equal or higher value. You have one and a half month to produce at least three replacement properties as getting the nod from them. Miss the window period, and you must start the process afresh.
Trade up carefully
If you are stepping up into a tenant in common arrangement, you are entering the big leagues. You are now becoming an owner of larger property in conjunction with other investors. You have a chance to diversify your holdings over several properties and increase your income.
For instance, you can sink your proceeds into an office complex, high-end hotel or even an assisted living facility. Therefore, you need to make your choices with a great deal of care. You need that once you commit; you are sharing in both the profits and debt such as a mortgage.
Hence, you need to pick one that promises great returns.
A 1031 property exchange offers you a chance to grow your real estate holding without paying taxes on the gains. However, you need to approach the entire process with a great deal of caution.