When it comes to investment properties, there will likely come a time in which you'll want to call it quits with some of them. You may decide to do so for a number of reasons. Repairs or maintenance fees may become too costly than you feel comfortable with or the area that the property is in may be on the decline and you want to get out before it's too late.
Whatever your reason, having a plan in place for how you're going to deal with profits you make from the sale is important.
As we approach tax filing season once again,you may already be aware that married couples filing joint returns are eligible to keep the proceeds from the sale of their home without being assessed capital gains taxes. In order the take advantage of this tax break, the home being sold has to be your primary residence. Also, only proceeds up to $500,000 are protected. Any amount over this will be taxed as high as 20 percent.
The best way to avoid paying capital gains taxes in a situation such as this is to do what's known as a 1031 exchange. It's through this process that proceeds from the sale of investment homes can be used to purchase other real estate as a way for you to avoid paying capital gains taxes.
Those pursing a 1031 exchange essentially contract a holding company to keep the proceeds of the sale of their old property in an account from the time of the closing. It's after that, that you're allotted 45 days to narrow in on three properties of "like kind" that you'd like to purchase.
The next milestone in the 1031 exchange process is at the 180-day point or tax day, whichever date is the soonest. This is the final date in which you're eligible to finalize the purchase of one of the previously identified homes. If the sale of the previous home occurred in late December, then a tax filing extension can be filed to give you some more time to close on the new investment homes, provided it doesn't exceed 180 days.
If you're considering buying or selling investment homes as part of the 1031 exchange, then a Melbourne, Florida, commercial property closings attorney can guide you though the process.