Suppose you bought an investment property years ago and the value has appreciated. You now want to sell that parcel and buy a new property, but you’re worried about paying capital gains taxes on the increased value. Fortunately, there is a strategy for avoiding capital gains by “trading” your property for a new one. It’s called a 1031 exchange. At Tucker Griffin Barnes P.C. in Charlottesville, our real estate lawyers have ample experience with these types of transactions. We provide personalized guidance and representation that can save you substantial expense.
The term 1031 exchange refers to a section of the U.S. Internal Revenue Code covering capital gains. Those are the taxes you pay when you go to sell an asset that has risen in value since you bought it. Many people a familiar with capital gains derived from stock sales. You buy 1,000 shares at $10, and hold them until they double in value. Your original investment of $10,000 is now worth $20,000, so when you execute the trade, you are liable for taxes on your $10,000 profit. The federal capital gains tax is 20 percent, so you owe Uncle Sam $2,000.
The same principle comes into play with real estate purchases. If your investment property was worth $160,000 when you bought it, but is now sold for $200,000, you have $40,000 in unrealized capital gains. If you sold your property, you would have to pay 20 percent tax on $40,000, a sum of $8,000 to the IRS. Fortunately, a 1031 exchange defers those taxes. You can sell your property, purchase a similar property within a set timeframe, and not owe taxes until you sell the new property. But, since there are no limits to the number of times you can execute a 1031 exchange, you can continue to defer your tax obligation.
For your real estate purchase to qualify as a 1031 exchange, there are simple rules you must follow:
As you can imagine, this process would be open for abuse if there weren’t strict rules for the timing of the purchases and the way sellers handle proceeds. The IRS requires funds from the first sale to be given to a qualified intermediary who is an independent third party with no financial or personal ties to the seller.
To get the full benefit of a 1031 exchange without running afoul of IRS regulations, you should consult an experienced real estate attorney, who can guide you through the entire process.
Tucker Griffin Barnes P.C. in Charlottesville facilitate 1031 exchanges on properties throughout Virginia. Call today at 434-973-7474 or contact us online to schedule a consultation. Our firm also has offices in Harrisonburg, Palmyra and Staunton.
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