Financial Resource

Article by Jeanette Joy Fisher

There are currently some 15 million Americans who own real estate investment property, and more and more of them are discovering the advantages of using 1031 tax-free exchanges for deferring capital gains taxes when they sell. A 1031 exchange is a provision in the IRS code that permits investment property owners to sell properties and buy new ones without having to pay taxes on the sale of the old properties, assuming stipulations concerning the use of the proceeds and time limits have been met.

Investors have 45 days following the sale of their old properties to find a new one and to comply with particular written notice provisions, as outlined by the IRS. The purchase of the new property must then close within 180 days. If those provisions are met, the investor will pay no federal income taxes on the property, assuming the new property is an investment like the one just sold. The replacement property must be of equal or greater value.

The property can be multiple houses, farms, or other real estate, but it can’t be the investor’s principle residence. The IRS prohibits using a 1031 exchange for the purchase of a new home. However, there is an exception to that rule. If the investor rents out a home for two years following the exchange, that house can then be converted to the investor’s place of residence, since the home was initially used to fulfill the stipulations of a 1031 exchange, which specify that an investment house must be replaced with another investment house.

If an investor chooses to take that route, after five years from the date of the new home’s purchase, that home can then be sold and the taxes excluded, due to an IRS exclusion for the sale of a primary residence, which can be 0,000 for married couples and 0,000 for an individual.

This can be a great way to avoid taxes on a significant amount of profit from investment in houses, but you’ll want to make certain you have followed the tax code meticulously. If you want to learn more about 1031 tax-free exchanges, you can visit http://www.irs.gov and consult with your own tax consultant, accountant, or attorney. It could save you thousands of dollars while you’re moving up the ladder in your overall real estate investment strategy.

Copyright © 2006 Jeanette J. Fisher

Tags: "conversion to a residence" and "1031 exchange", 1031 exchange, 1031 exchange into house convert to residence, 1031 into home purchase, 1031 tax free exchange, 1031 tax free exchange conversion to residence, 1031 tax free exchanges, amount, capital, capital gains taxes, Convert, copyright, date, Exception, exchange, exchange property, exchange property for more property, federal income taxes, fisher, free, home, house, income, individual, Investment, investment property change into primary, investment property owners, investor, irs 1031 exchange convert to residence, irs 1031 tax consultant, irs code, jeanette, like kind exchange property converted to home, like kind exchange, conversion to a residence, married couples, notice, notice provisions, place, principle, principle residence, proceeds, property, purchase, real estate investment, real estate investment property, rents, replacement, Rule, shell recruitment accounting or commercial or finance or hr or management or pension or investment or procurement or supply or support, tax 1031 exchange irs conversion, tax convert investment property to primary home, tax free exchange, time, time limits, use, value, way