Commercial and residential real estate is a financial investment . The Internal Revenue Service (IRS) certainly sees it that way, and if the property appreciates in value before you sell, there is a chance that you could owe a significant capital gains tax obligation to the federal government.
Fortunately, under Section 1031 of the Internal Revenue Code, property owners can defer this tax obligation indefinitely through what is known as a “1031 exchange.” If you will be using the proceeds of your sale to purchase a new investment property, you may be eligible for this tax deferral, and at Clear Title, we can help you maximize the tax benefits of a 1031 exchange.
Understanding the 1031 Exchange
When you make money on an investment, you incur a tax obligation to the IRS. For investments held a year or longer, this appreciation is taxed as a long term capital gain. Ordinarily, you are required to pay capital gains tax when you sell an appreciated asset (such as your investment property); however, if you acquire a similar type of asset with the proceeds from the sale, the IRS permits you to defer your tax obligation until you make a sale that does not result in this type of “like-kind” exchange.
For purposes of Section 1031, if you purchase virtually any type of investment real estate with the proceeds from your sale, this will be considered a like-kind exchange. So, for example, if you are selling so that you can buy a real estate investment, you are eligible for the tax benefits under Section 1031. Certain “exchange expenses” are eligible for tax-deferral treatment as well. As a result, you can use proceeds from yoursale to pay brokers’ commissions, transfer taxes, recording fees and other closing costs without worrying that you will have to pay tax because the money did not go directly to your new purchase.
Of course, since we’re talking about the federal taxes, nothing is quite as straightforward as it seems. You must claim the benefits of a 1031 exchange with appropriate documentation signed in advance of the transaction; and, if you fail to do so properly, you may receive a letter from the IRS asking for an explanation. At Clear Title, we can assist you with your 1031 exchange, and we will work closely with you to ensure that you do not run into issues with the IRS down the line.
Why Choose Clear Title?
Clear Title is a full-service closing company serving residential home sellers throughout Northwest Florida. At Clear Title, we offer:
- Extensive Legal Experience – Company founder and CEO Stephen R. Moorhead is a board-certified real estate attorney who has written and spoken extensively on the subject of 1031 exchanges.
- Personalized Service – Our professionals will work with you to maximize the benefits of your 1031 exchange.
- Comprehensive Closings – We handle all aspects of your closing, streamlining the process with in-house escrow services and easy-to-use, cloud-based document management technology.
Get the Help You Need for Your 1031 Exchange
If you would like more information about minimizing your tax obligations when you sell your investment real estate, contact Clear Title. To speak with one of our experienced professionals, please call Pace (850) 994-3838 or Pine Forest (850) 202-8518, downtown Pensacola office (850) 361-4029 or contact us online today.