A 1031 Exchange Can Help Your Real Estate Business

It almost doesn’t matter whether the real estate market is in an up or down cycle. For many people, buying properties and flipping them is a profitable business idea.

What About Taxes?

But many people who do flip properties forget one thing that can eat into your profits really quickly: the profit you make on a sold property is income. So, if you are constantly buying property and selling properties for more money, how will you handle the income made on the profits from those sales?

If taxes eat too much, there won’t be enough money to flip into another property, making the prospect of flipping property to be nearly impossible.

The 1031 Exchange

Thankfully, the government has a solution for you: it’s called a 1031 exchange. A 1031 exchange allows you to delay paying taxes on the profit that you make from the sale of property, thus allowing you to put the entirety of that profit into a new property.

Even better, so long as you keep the money in property, or use it to buy new property, you can conceivably defer the taxes on the profits made, indefinitely.

And again even better, you don’t have to immediately buy a new property, or do an immediate buy-sell flip of property. So long as you sell property and use the money to buy new property within 180 days, you get the benefit of the deferment of the taxes.

1031 exchanges can benefit you even if you’re thinking of a refinance. Many people refinance to get cash equity out of their properties. But again—that’s profit, and thus taxes. But the 1031 exchange treats the refinance as a brand new purchase of property, and thus, allows you to defer taxes on the refinance.

Paying Taxes Back

So when do you have to ultimately pay back the taxes on all of this profit you’ve made from numerous flips of real estate?

Whenever you don’t put the money into new property (after the 180 allowance period). Alternatively the money will be due when you pass away, so for estate planning purposes, make sure you’ve accounted for payment of those taxes.

What Properties Qualify?

Not all property qualifies for a 1031 exchange. Unfortunately, it only applies for business, or investment purposes—not for residential property (which you probably wouldn’t just flip for profit anyway).

And, the properties flipped must be similar in nature. For example, commercial for commercial real estate, or an office complex for an office complex, or a single family investment home flipped for another one.

But you don’t actually have to be a company; an individual can use a 1031 exchange; what matters is the type of property, not the person or entity doing the flipping.

Real estate businesses have a lot of legal issues which we can help you with. Reach out to the West Palm Beach commercial litigation attorneys at Pike & Lustig for help with your business today.

Source:

investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx