If you’re a Columbus rental property owner wondering how to avoid paying taxes after selling a property, you probably have a lot to gain from doing a 1031 Exchange. This program allows you to defer those taxes if you reinvest the earnings from your sale into another purchase. It’s a great way to continue investing in Columbus properties. It also saves you a heap of money on taxes.
With a 1031 Exchange, you can keep more of the money you’ve earned and establish a more effective long-term investment strategy.
Why a 1031 Exchange Makes Sense
When you sell a Columbus investment property, you need to pay taxes on the money that you earn from the sale. One of the ways to defer those taxes is to buy a new investment property – or several properties – that are similar to the one you’re selling.
This makes sense when you know you’ll have a large tax exposure from the sale of your investment property. Perhaps you bought a single-family rental home for $120,000 10 years ago, and now you’re able to sell it for $200,000. The $80,000 profit will be taxed. In this situation, a 1031 Exchange will save you quite a bit.
Another good reason to do a 1031 Exchange is when your rental property is older and needing more maintenance than you can keep up with. Selling a home with ongoing repairs will allow you to reinvest the proceeds into a newer property that will provide better cash flow.
How to Manage a 1031 Exchange
Specific steps need to be taken when you want to defer your taxes with a 1031 exchange.
- Make sure your property qualifies for this benefit. This tax program is meant for investment homes. You cannot sell the home you’ve been living in and reinvest the money to buy a vacation home.
- You’ll need to exchange with a like property or properties. The new property you choose must have a value that is the same or higher than the original property. If you walk away from the exchange with any profit, they will be taxable.
- Find one property, two properties, or three to exchange with your current property.
- Pay attention to the timelines. You’ll need to identify a replacement property within 45 days of selling your original property. Then, you have 180 days to close on the new sale. The entire exchange must take place within the 180 days (meaning you don’t have 45 days plus 180 days – the clock does not reset).
- Use an intermediary and don’t take any of the cash from the sale of your property. The intermediary will hold your funds until they can be reinvested in your new purchase. Ask your property managers for a referral.
Protecting Your Wealth with a 1031 Exchange
The 1031 Exchange is one good way to keep all of the money you earn off the sale of an investment. Remember this isn’t a completely tax-free option. You are technically deferring the payment of your taxes.
However, the current law allows you to do a 1031 Exchange as many times as you want. So, if you decide you’re going to leave your rental property to your children or beneficiaries after you die, they’ll receive a step-up, which will let them avoid all the taxes you deferred.
As you can see, there are many benefits to this tax incentive. Make sure you’re following all IRS guidelines – this isn’t as easy as you think. If your taxable income is already lower this year, the exchange may not even be worth it to you. Make sure you understand the timelines and the escrow requirements. Always talk to your accountant or tax advisor before moving forward with something like this.
At Solutions for Real Estate, we use First American Exchange Company to help our investors manage a 1031 Exchange. They’re out of Cleveland, and we’re happy to make this referral for you if you need the extra support. Contact us at Solutions for Real Estate, and we’ll talk about whether this makes sense for you and your investment portfolio.
