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Instead of selling your property, what if you exchange it?

If your home in the bay area has significantly appreciated in value, selling your property will mean taking on a sharp capital gains tax. Instead of selling, consider exchanging your property.

A real estate professional, tax advisor, and other exchange specialists can guide you through exchanging your business or investment property for a similar property using section 1031 to avoid the gains tax or receive what is known as “deferred gain treatment.” This allows you to reinvest profits from your exchange of property into more productive areas, allowing you to grow your business.

What property qualifies?

As of January 2018, the “like-kind exchange” section 1031 of the Internal revenue code states that only real property qualifies for the tax cut. Before 2018, non-real personal property could qualify for this tax cut, such as machinery, second homes, artwork, and intellectual property. As of 2018, only the following and similar real property investments qualify:

  • Business investment property
  • Home office
  • Vacation rental
  • Primary home converted to investment property

What’s the catch?

After you close on selling your property, you have 180 days to acquire the like-kind property to replace yours. In the first 45 of those 180 days, you and your investment team must identify and reveal the property or properties you intend to own. A real estate specialist can best explain how the value of those properties affects the exchange, but generally if they are equal or greater in value to yours, they qualify.

The property you sell and acquire must be in the United States, both used for similar purposes, and it can be across state lines. However, each state has a separate tax policy to carefully consider and review before completing the exchange.

If you hold a property for investment purposes and would like to avoid gains tax, a 1031 exchange might be for you.

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