If you are a real estate investor, or you plan to venture into the world of real estate investing, it is important to have a baseline understanding of applicable tax laws. In addition, you need to be aware of the strategies required to pay the IRS only what is actually owed and nothing more. This is where a 1031 exchange comes into play.
If you engage in the selling of investment real estate, whether the property sold was commercial, industrial, or residential in nature, the investment transaction will be subject to taxation via the Internal Revenue Code.
However, Section 1031 of the tax code enables real estate investors to implement a strategy to avoid paying taxes upon the sale of investment property. Instead,investors retain the option to defer paying taxes on their gains until sometime in the future. Utilizing this section of the tax code is what is known as a “1031 exchange.”
Section 1031 of the Tax Code
Section 1031 enables real estate investors to retain all the proceeds from a sale, as long as those proceeds are reinvested in “like kind” real estate. An investor does not avoid ever having to pay taxes on their gains, but they are able to accomplish the next best thing which is to defer paying the tax until a later date.
If the property being acquired is of equal or greater value than the value of the property being sold, an investor will not be liable for taxes.Also, the value of the replacement property can be allocated to more than one property.
Here is a good example of how a 1031 exchange works. Let’s say an investor decides to sell an apartment complex for $2,000,000. Subsequently, the investor purchases another “like kind” investment property of equal or greater value.That could be another apartment complex worth two million, or they could purchase a condominium complex worth $500,000 and two strip malls each valued at $750,000.
When it comes to a 1031 exchange, once you sell a piece of property,you have 45 days to inform an intermediary in writing as to the specific replacement property they plan to acquire. Make sure to adhere to this deadline. Why? Because if an investor fails to identify a property within 45 days, the 1031 exchange becomes invalid.
To Learn More About How Hard Money Lenders in Los Angeles Can Help Fund Your Next Project Contact PB Financial Group Today
If you are interested in purchasing real estate or want to fix-and-flip a property that may very well become the subject of a 1031 exchange, you need to work with a reputable and respected hard money lender in Los Angeles. There is where PB Financial Group Corp comes into play.
PB Financial Group is a premier direct hard money, private money, and bridge lender, who has been providing quick funding since 2006 and have funded over 2700 hard money/private money loans.Our objective is to work to satisfy your financing needs on important real estate projects throughout California in an efficient and effective manner.
PB Financial NMLS #357614/DRE #01522495