Trading Real Estate Properties to Keep The Taxman At Bay
If you are thinking about selling real estate property you should know that capital gains tax applies. Capital gains tax is charged on the profit you make when selling a real estate asset for more than you spent acquiring it. When you do sell a property, a lot of your income will be taxed. Fortunately, there is a way you can hang onto your money. Trading property real estate keeps the taxman at bay within the letter of the law. All you have to do is trade real estate properties through a DST (Delaware Statutory Trust) 1031 exchange. You can defer paying capital gains tax on a like-kind exchange, as long as certain criteria are met. If you have ever exchanged basketball cards, you are familiar with how things go.
Why a Trade Is a Good Idea
A 1031 exchange – or a like-kind exchange, Starker – is an investment tool largely used to defer paying capital gains tax. It was named after the section 1031 of the Internal Revenue Code and it implies trading a business or investment asset for another. There is no doubt that it sounds tempting, but is the 1031 exchange worth the effort? Of course, it is. A like-kind exchange offers you the incredible opportunity to avoid paying the capital gains tax associated with selling a real estate property. If you are a real estate investor, you will be able to balance your portfolio right away.
Delaware Statutory Trust for a Trade
DSTs can be successfully used to do 1031 exchanges. A Delaware Statutory Trust is basically a business trust that can be used for holding title to investment real estate. Although the business trust was created under the Delaware law, it does not necessarily have to be established in the state of Delaware. It is very similar to how a Limited Liability Company functions, the only difference is that it qualifies for a like-kind exchange. The best thing for you to do is buy beneficial interests in a Delaware Statutory Trust.
Rules about the Trade
To complete a like-kind exchange, you have to meet certain criteria. Here is a brief description of the various requirements:
- Invest For Business Purposes. A Starker is not for personal use. Section 1031 is used for business and investment property. It is not possible to swipe a primary residence for a vacation home.
- Property Identification and Replacement. Upon the closing of the first property, the exchanger has 45 calendar days to find a replacement property. No more than 180 days later, a property must be purchased.
- 3 Property Rule. Investors can identify up to 3 replacement properties. Obviously, not all of them will be used in the trade, but they are necessary as a backup.
- Attention Should Be Paid To Mortgages. The mortgage loan will be considered and treated like cash income.
The bottom line is that exchanging real estate properties is not child’s play but you can dodge the taxman. It is important to have a clear understanding of what you are getting yourself into, though, before taking action.