On Behalf of Palacios Law Group
Selling property can have some serious tax consequences. However, if you own rental properties and wish to get rid of them, you may have a tax option that will allow you to bypass that huge bill.
Kiplinger explains you might be able to use a 1031 tax-deferred exchange.
What it is
A 1031 tax-deferred exchange allows you to avoid having to claim a gain or loss on your taxes if you trade your property for a similar property. This is a good setup if you want to get rid of one rental property but you are looking to buy a new one. If you can find someone to do an even trade with you, you will both reap the tax benefits.
Do note that similar does not mean the same. All it really means is that you must trade the property for a property that you will use for business and not personal reasons.
You also have a limited time to make the deal. You have 45 days to find a property and then 180 days to close on it. It can be difficult because you need to have similar values in the properties in most cases. You cannot trade for a property of lower value than yours.
If any cash exchanges hands between you and the other person, that cash is taxable. It does not become part of the exchange. In addition, if you trade for a property worth more than your property, the difference in value becomes taxable.
On the surface, a 1031 tax-deferred exchange may seem simple, but there are many details you must understand to get the full benefits of this tax option.