Tax-Deferred Exchanges: If you enjoy paying capital gain taxes when selling an investment or business property, you probably won’t want to learn how to pyramid your real estate wealth by legally avoiding taxes on profitable sales. However, if you prefer to build realty wealth without paying taxes, as millions of other investors and major corporations do, read on. Or you might enjoy selling your rental property at a profit, perhaps an apartment or commercial building, and using those funds to acquire your ultimate dream home without paying capital gains tax. Read on.

Ever since 1921, Internal Revenue Code 1031 has encouraged real estate investors to trade one (or more) “like kind” investment or business property for another property (or more) of equal or greater cost and equity without paying profit tax. Uncle Sam views a tax-deferred exchange as one continuous investment so no tax is due. However, “like kind” property means all properties in the trade must be held for investment or use in a trade or business. “Like kind” does not mean “same kind” of property. To illustrate, you can trade your vacant land for a rental house. Or you can trade your apartment building for a shopping center, or a warehouse for an office building. However, your personal residence is not “like kind” so it is not eligible. Over the years, IRC 1031 has evolved to make tax-deferred realty exchanges easier than ever before. After 1984, when so-called Starker exchanges became legal in IRC 1034(a)(3), direct property trades were no longer necessary.

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