Have you ever heard of something called a “1031 exchange”? It might sound like some secret code, but it’s actually a way that people who own property can sell it and use the money to buy a new property without having to pay as much in taxes.
Here’s how it works: let’s say you own a rental property that you want to sell so you can buy a bigger rental property. Normally, when you sell a property, you have to pay something called “capital gains tax” on the profit you made from the sale. But with a 1031 exchange, you can use that profit to buy a new property, and you won’t have to pay as much in taxes.
Why is that? Well, the government created something called “like-kind” properties. That means that if you sell a rental property, you can use the money to buy another rental property, and it will be considered “like-kind.” If you do that, you can defer paying the capital gains tax until you sell the new property.
So let’s say you sell your rental property for $100,000 more than you paid for it. If you didn’t do a 1031 exchange, you might have to pay $20,000 in taxes on that profit. But if you do a 1031 exchange and use that money to buy a new rental property, you won’t have to pay that tax yet.
Of course, there are some rules you have to follow to do a 1031 exchange. For example, you have to find the new property within a certain amount of time, and you have to use a qualified intermediary to help you with the exchange. But if you follow the rules, a 1031 exchange can be a great way to save money on taxes and keep growing your real estate investments.
So, if you ever hear someone talking about a 1031 exchange, don’t be intimidated! It’s a way that people who own property can save money on taxes and keep growing their investments.
Thinking of moving or investing and need a referral for a Real Estate Broker, we can help: email us at TEAM@McDanielCallahan.com, fill in the form below or call 925-838-4300. Terry McDaniel DRE license #00941526
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