One of the biggest advantages to owning investment property is the ability to defer capital gains tax when you sell by using a legal process, sanctioned by the Internal Revenue Service, which allows you to trade equity gained in the investment without paying capital gains tax at the time of sale. You simply trade your equity up to another investment and defer the tax on the gain.
Internal Revenue Code Section 1031 allows investors to defer the equity gains on investment property as long as they purchase an investment equal to or more than the price that the property sold for. In addition, if the property sold has mortgage debt, then the trade up property must have mortgage debt equal to or more than the property that sold.
In addition, the exchanger must identify the trade up property within 45 days of the closing date of the relinquished property. Once the trade up property has been identified then the exchanger has 180 days to close on that property from the date the property was relinquished.
I have assisted clients in hundreds of these types of transactions and strongly recommend that if you are considering one, contact a third party exchange accommodator prior to listing your property for sale so they can advise on the process and handle the paperwork that needs to be signed when you are in escrow on your relinquished property.
