If you’re a real estate investor, you may have some enticing tax-related options available when it comes to selling a current property and purchasing another. Take, for instance, the 1031 exchange.
With a 1031 exchange, investors are allowed to defer the payment of capital gains tax on an investment property when it is sold – provided that a property of “like-kind” is purchased, using the profit that is gained on the sale of the initial property.
In this case, no gain (or loss) will be recognized by the IRS – at least until you sell a property and eventually “cash out.” Similar to deferring the gains taxes in an IRA or 401(k) retirement savings plan, the deferral of tax can allow your gains to grow and compound exponentially.
But even so, when you purchase any type of real property, it is oftentimes still necessary to obtain a mortgage – and with a 1031 exchange, there can be some items to be mindful of, such as:
- Following a specific timeline. In this case, the exchange period only runs for 180 days. But it can end earlier than that if you submit your tax return for the year in which the 1031 exchange occurred before the 180 day period is up. You also have just 45 days to identify the “replacement” property (i.e., the property you intend to purchase).
- There must be a qualified facilitator or intermediary involved in the transaction.
- The new property must also be used for business purposes (such as exchanging one rental property for another rental property).
Given these strict parameters, it can be beneficial to work with a lender that can get your new loan approved and closed within the given 180 days (or less).
At Galaxy Mortgage, we make the lending process easy. We work with individuals, families, and investors in getting the funds they require to secure the ideal property. For more information, or to get the loan process started, contact us today.