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Like Kind Exchange of Property

BY Chris Castillo

Millions of people own real estate investments in the United States. When someone decides to sell their real estate investment they will ultimately have to pay taxes on the gain. So, you may ask yourself "Is there a way to avoid paying these taxes?" The answer is yes...and no. Yes as in you will avoid paying taxes when you sell your investment property but no as in you are merely deferring these taxes. That is, you are postponing paying taxes until a future date. How can this be possible you ask? IRS Code 1031, otherwise known as the "like-kind exchange", allows the exchange of property without paying taxes on the sale.So, what is like-kind property you ask? The IRS defines like-kind properties as "properties of the same nature or character, even if they differ in grade or quality." The exchange of real estate for real estate are exchanges of like-kind property. Uncle Sam has given us all a great tool to defer taxes and watch our investment grow over the long run.You can see the benefit of this transaction with an example. Say you purchased a house in 2000 for $150,000. You rent the house the entire time and ultimately sell it this year for $400,000. For simplicity sake in this example, you have a gain of $250,000. You have two options; if you decide to take the cash you will have a TAXABLE gain of $250,000 on your tax return. If you use the "like-kind exchange" process; you won't pay a dime of taxes if you put the entire gain to another rental property. Now, you may say, "How in the world can I get money out of this without paying taxes?" One way would be to refinance the new property after you purchase it. Keep in mind that the IRS has very stringent requirements for this transaction. There are time requirements, for example, that MUST be followed. Lastly, and this is very important, be careful with this transaction because if you receive money in the exchange, the transaction will be treated as a sale rather than a deferred exchange. If this happens, you must recognize gain or loss on the transaction, even if you later receive the replacement property. To learn more about the 1031 Tax Free Exchange or real estate, visit {a href=" http://www.real-estate-owner.com/1031-exchange.html" target="_blank"}www.real-estate-owner.com/1031-exchange.html

Chris has dedicated his time to create a site that anyone can access for quick information dealing with real estate taxes.

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