If you had investment property and decided to sell, you may not want to pay a lot on property taxes because they would eat away at your profit. Well thanks to 1031 tax exchanges, you can actually avoid paying capital taxes as long as you reinvest the money in a like-kind property. Here are some things that can help you deal with these tax exchanges without issues.
Focus on Relevant Like-Kind Property
A huge stipulation for rental property 1031 tax exchanges is to reinvest the money you earn from one property into a property that is like-kind, meaning it has the same nature. You thus need to be careful about the properties you're looking to reinvest in because you don't want to choose the wrong type on accident.
The best thing you can do is carefully analyze the current property you're looking to sell, taking into account things like value and unique attributes. Then you'll know what qualifies as like-kind property and subsequently be able to narrow your search scope.
Hire a Consultant When Special Circumstances Come Up
Investing in real estate isn't always going to be black and white. There are a lot of gray areas and thus room for unique situations to pop up. If they ever do when you're trying to take advantage of 1031 tax exchanges, then it's a good idea to hire a consultant that can help you navigate accordingly.
For instance, you may have multiple properties you're looking to sell and then take the proceeds to reinvest in more properties. Or maybe you're dealing with really unique real estate. Either way, consultants can give you guidance and help you stay on a smooth path to avoid delays and wasted profit.
Verify the Fund-Holding Account is Secure
When you sell investment properties and get proceeds, they will enter a special account when you opt to use 1031 tax exchanges. You want to find out more about this account, particularly how secure it is and will be throughout the process of buying more investment properties.
It's imperative that the funds that enter this account are properly tracked and that there are security measures to keep them protected. Then you'll feel better about going through with 1031 tax exchanges.
If you plan on investing in multiple real estate properties and selling them over the years, using 1031 tax exchanges is a great way to avoid paying a lot of taxes. Just make sure you understand how these exchanges are supposed to work before getting started.