There is a catch as there so often is with tax laws exceptions. The catch is that you can’t get your profits in cash, but you are allowed to roll over your profits into another investment property that you MUST purchase within 180 days.
If you don’t “need the money now” then rolling your profits into a replacement property will add to your net worth by saving taxes now and should allow for greater appreciation of the property purchased.
One other reason to do a 1031 tax free exchange is that the IRS calculates a 3% depreciation amount for every year an investment property is owned. This amount is “re-captured” at the time of sale by being added back into the property’s cost basis and taxed at the taxpayer’s marginal tax rate. Taking advantage of selling using a 1031 tax free exchange will also allow for the taxation of IRS depreciation to be rolled into the replacement property. Deferred
Under IRS tax code 1031 a tax fee exchange is treated as an exchange and not as a sale. This is an important distinction since selling is always treated as a “taxable event”. Deferred
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