If you own investment property in Delaware, including Bethany Beach real estate, and are looking for ways to manage your assets, you should become familiar with a 1031 exchange. A 1031 exchange is basically a swap of similar properties that are owned for investment or other business purposes. Using a 1031 exchange allows the investor to defer capital gains taxes if the swap is conducted within a specific time frame.
The 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code. By using this tax exchange, individuals can manage their properties and maximize their investment in real estate. It can be confusing at first, but by doing some research and meeting with a qualified, experienced professional, you can begin using this strategy that has been available for some 100 years.
Before you begin using this investment strategy, you need to find what is known as a qualified intermediary to help handle a 1031 exchange involving Ocean View, DE real estate. You can begin your search by asking your real estate agent or tax attorney if they are qualified to handle the task. If not, they should be able to recommend someone who is well-versed in these transactions, which have very specific IRS rules that must be followed.
Once you pick a qualified intermediary, he or she will be able to explain the process and use specific examples. In a 1031 exchange, investors can change their specific investment properties, including Fenwick Island real estate, without taking an actual cash profit or realizing a capital gain.
Individuals can continue to roll over gains from one investment to another as many times as they like while their investment grows tax-deferred. Even if you realize a profit with each transaction, you won’t owe tax until you finally cash out. Then you would pay one tax at a long-term capital gains rate of 15% or 20%, depending on your income.
There are specific rules to follow in a 1031 exchange. Failure to closely follow the regulations can lead to expensive mistakes that can affect your taxes. First, individuals are not permitted to handle 1031 exchanges by themselves and must pick a qualified intermediary to assist with the transaction. Since profits from a property sale are taxable, investors cannot receive that money, or else they will be liable for the full capital gains tax burden. Instead, the intermediary holds the profits while the investor shops for a new property.
An investor has 45 days from the sale of the property to identify up to three potential replacement investment properties, including Bethany Beach homes for sale that will be used for rental income, and note the selections in writing. The IRS states that 1031 exchanges are to involve like-mind properties, which means the properties must be used for investment or business purposes. Investors have 180 days from the closing date on the original property to buy a replacement property. The property swap must be reported via IRS Form 8824.
According to Ramsey Solutions, properties involved in a 1031 exchange don’t have to be exactly alike. For instance, the website says you can exchange rental Fenwick Island real estate for a plot of land, or an apartment building for an office building. The main distinction that the IRS is concerned about is that those properties are used for business or investment purposes.
According to IRS rules, the replacement property you purchase, such as houses for sale in Ocean Beach, DE, must be of equal or greater value than the one being sold to defer all capital gains taxes. If the replacement property is worth less, you must pay taxes on the difference.
Another way to take advantage of the 1031 exchange is through a 1031 exchange DST. That stands for Delaware Statutory Trust, which is where individuals can join in investment in properties to receive profits and tax advantages.
What makes a 1031 exchange DST attractive to many investors is that they can participate without having to be the sole owner of the investment property or properties. Investors are essentially part-owners and will receive a percentage of the cash flow from the property based on the percentage they own.
Properties usually associated with 1031 exchange DST include office space, commercial real estate, industrial buildings, multifamily housing, and student housing. One specific example of the kind of property involved would be storage units, which are always in demand. Deals are put together with the intention of generating regular income for the investors. If the investment deal incurs a loss, investors will receive tax benefits.
Before getting into a 1031 Exchange DST, individuals should carefully research every aspect of the investments involved, including how experienced the sponsoring companies are. Investors need to know the level of risk and reward they will be dealing with.
There are several benefits as well as drawbacks to a 1031 exchange DST. Among the benefits include the fact that a single trustee is in charge, individual investors are not responsible for managing properties, investors can get in for as low as $50,000 and liability is limited to the amount of the investment. Investors usually receive monthly cash flow along with tax benefits such as interest deduction and depreciation.
Among the drawbacks are that individuals have no control over the investments and must rely on the management skill of sponsors. As with many kinds of investments, there is always the risk of losing the investment principal. The rate of return isn’t guaranteed and liquidating your position can be difficult.
To learn more about the fascinating opportunities using 1031 exchanges, speak with a qualified professional today. If you plan to buy Bethany Beach homes for sale as part of your investment strategy, let Joseph Connor put more than three decades of experience in waterfront real estate to work for you.