If you own real estate and are considering selling it and purchasing another property in the state of California, you may be aware of the 1031 tax deferred exchange, otherwise known as a 1031 transaction. In essence, it is a method that provides the owner of an investment property with the option to sell the property and purchase another similar property or properties while deferring the capital gains tax. Deferring the capital gains tax is the key point to all of this, and that is where the 1031 transaction becomes complicated.
In essence, a 1031 exchange gets it name from Section 1031 of the United Stated Internal Revenue tax code that allows tax payers to avoid paying capital gains taxes when selling investment properties as long as certain criteria are met. That being stated, these criteria may not be practical for all real estate investors. For example, the proceeds from the sale must be reinvested in similar properties of equal or greater value within a particular time frame. If that time frame cannot be met, the capital gains from the sale become taxable.
The current economic shutdown has made scouting properties and performing due diligence almost impossible.
This can be a deal breaker for a great deal of real estate investors whom are currently in limbo with their 1031 Transactions. However there is solution to not being able to timely find suitable reinvestment property. This other method of deferring capital gains tax is for you to Installment Sale your 1031 transaction account balance. This is called an Installment Sale rescue of your failing 1031 exchange. There are a number of reasons why real estate investors should consider utilizing the Installment Sale Method as listed below….
- The real estate investor may be in the hunt for a property that has more favorable return prospects which will take longer than the strict 1031 time deadlines.
- The real estate investor may decide to diversify assets and not invest back into real estate but still wants tax deferral.
- The real estate investor may be looking for a managed property as opposed to managing the current property himself or herself.
- The real estate investor may be considering consolidating and paying off debt on a tax deferred basis.
- The real estate investor may be considering turning a single property into non investment real eastate assets.
In essence, the Installment Sale Method pays the proceeds to the seller over a number of years as income instead of in one lump sum as a capital gain. The seller chooses how many years the distribution will take place thus, controlling the payment of tax liabilities. The seller is taxed in later years. The tax is based on the yearly distribution schedule. That means the proceeds from the sale are not taxed in one lump sum at the time of the sale. Avoiding, a lump sum distribution also further reduces the tax liability. Due to the tax implications, the Installment Sale Method should only be conducted with the help of a professional attorney that is an expert in taxation.
In conclusion, the good news is that you do not need to take part in a 1031 transaction in order to defer capital gains tax when buying and selling real estate for profit. There is a solution that is far more cost effective and a whole lot less stringent.
Please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise structure that is far more effective than a complicated 1031 transaction. Our team of experts specializes in providing customized Installment Sale strategies that delay tax impact. TDS takes great pride in assisting sellers of appreciated assets in deferring the capital gains tax that greatly enhances the ability to grow your net worth. Our company was founded by a LLM tax attorney with over 20 years tax deferral experience and expertise with a singular focus on assuring sellers delay of taxation.