Capital gains tax occurs when an owner of Real Estate sells their property for a gain. The owner will be subject to a 15% tax on their profit. For example: James buys a property for $250,000, after five years James investment property is up for sale for $400,000. In that five years James paid his mortgage down to $200,000. James now has about $200,000 of profit (before fees); if James chooses not to use a 1031 exchange with his investment property he would pay about $30,000 in Capital Gains Tax.
The process of the 1031 exchange begins before the sale of a investment property. Tax code 1031 allows for owner to roll over their profits from the sale of their real estate over to their next property, delaying payment of Capital gains. As an investor capital can be the difference between taking advantage of the next opportunity or not.
An investor has 45 days from the close of escrow of their last property to identify (3) homes to report to the Exchange company. The person using the 1031 exchange will need to close on a replacement property within 180 days from the close of their prior home.
The 200% Rule: An investor can identify up to three properties that shouldn't add up to more than 2x the sale of their personal property. For example: Tonya recently sold her property for $200,000, she can identify three properties up to $400,000 and report them to the exchange company. If he closes on any of those three properties with 180 days, he can delay paying Capital Gains.
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