Capital gains taxes are expensive. If you’ve ever sold property, you know that it can be a scary sight to get a capital gains tax bill. How scary? Let’s say you purchased property at $385,000 a few years ago and when you sell, it goes for $450,000. If your property is in Atlanta, Georgia, your filing status is married and your annual income is $150,000…you’ll owe approximately $14,220 in capital gains tax.
But, there’s a silver lining called a 1031 Exchange. What’s that? It’s basically a way to defer paying the capital gains tax until many years later when you decide to "cash out" your investment. In essence, a 1031 exchange is a swap of one business or investment asset for another. It’s usually referred to as a ‘like-kind’ exchange.
When dealing with real estate, 1031 exchanges allow you to sale a property and buy another property without paying any capital gains tax. This is great, right? Yes, but there are a few things to keep in mind.
1. 1031 Exchanges don’t apply to personal property…for the most part.
- These exchanges are only for investment and business property. A person cannot sell a primary residence for another.
2. You must designate replacement property.
- When you sell your investment property, you have 45 days to designate a like-kind replacement. In the meantime, an intermediary must hold the cash from the sold property.
3. If you receive any cash, it will be taxed.
- If you don’t have an intermediary, third-party, to hold cash for you during an exchange, you’ll be taxed for that amount. This includes cash that you profit after an exchange.
4. Consider loans and mortgages.
- Is one property valued more than the other? This could result in profit. Be sure to consider all scenarios that may arise in your 1031 exchange.
5. You must close within 6 months.
- You have 180 days to close on the replacement property after you’ve closed on the sale of the original property. This runs concurrently with 45 day rule of a delayed designation.
1031 Exchanges can definitely be complicated, but The Ruffin Firm can help you navigate the process. Give us a call at 470.344.5943 or schedule a consultation.