HOW THE 1031 EXCHANGE CAN KEEP YOUR TAX BILL IN CHECK
The 1031 exchange, or “like-kind exchange,” has proven to be a popular tool for real-estate investors for many decades and, given its surging use, 2023 is expected to be no exception.
This process suspends capital-gains taxes from the sale of a property if the proceeds are used to purchase a new “like-kind” property within a delineated period. It is only when the owner sells that new property that capital gains taxes are triggered.
1031 exchanges are expected to increase as rents reach a steady plateau, bonus depreciation decreases to zero by 2026, and, given the rise of cash buyers with today’s rising mortgage-interest rates (at 7.5%, or greater). Property owners can even opt to transfer ownership of their property to their heirs upon their demise, which effectively eliminates tax liability for the next generation by providing the latter with a stepped-up basis.
Of course, this strategy is not without its own set of complexities. For example, investors must adhere to strict guidelines to qualify. But with careful planning, and/or guidance from a “qualified intermediary,” investors can maximize the benefits of the exchange and minimize their tax burdens.
Since it remains a powerful tool for real-estate owners, 2023 may be the year for them to swap … until they drop!
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For more information on how these exchanges are reported, see Form 8824.
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