Houston Investors: Abiding By the Rules of the 1031 Exchange
Paying attention to the 1031 exchange can save Houston investors in real estate money. It also can come into play for anyone that has inherited a Houston property and is looking to sell it instead of living in it. The 1031 exchange helps Houston investors who are buying and selling properties by allowing them to exchange assets for one another. With this, someone will not have to pay capital gains on these properties.
Following the Rules
To qualify for the 1031 exchange, the rules must be followed to the letter. It is much easier to pair up with a professional tax adviser to make sure that there are no rules being broken. The 1031 exchange is a great way for investors to avoid paying capital gains, but it can become complicated on how to qualify.
To put it simply, the first Houston property must be sold after it has increased in value. This income must be put into an escrow account. Then, within a certain amount of time, the replacement property must be purchased. If any of these guidelines are not met, the properties no longer qualify for the 1031 exchange.
Qualifications for Properties
The Houston properties must meet certain guidelines as well. There are two main portions to pay attention to: the like-kind property and qualifying property criteria. The like-kind criteria states that the two properties exchanged must have the same nature. That does mean that they can be different in terms of their quality.
There are many Houston properties that fall under the qualifying property list. Many personal residence and vacation home situations will not be included in this category. Instead, it is concentrated on purchasing rentals, land, office buildings, stores, trailer parks, and much more.
The new property must be found within 45 days. That does not mean that it needs to be purchased, but the process needs to begin. At the end of the 180-day mark, the property must be purchased. There are not extensions for these two rules. Once the timeframe is over, there is no way to qualify for the 1031 exchange.
Length of Ownership
There is a contingency that the Houston properties involved must be owned for two years after the exchange. If a buyer or seller decides to sell a Houston property before this two-year mark, they will now owe capital gains on the exchange. There must be a long-term investment in the property for the owners to avoid paying capital gains. The properties cannot be part of a rotating real estate portfolio.
Houston investors can take advantage of the 1031 exchange to save on capital gains. Properties that are being sold to purchase another similar property could qualify for an exchange. Houston investors that are able to navigate the specific rules of the 1031 exchange can get a break from paying taxes and use that money to invest in more real estate properties. Any portion of the rules that are broken or not met will disqualify an investor, and they will be asked to pay capital gains. Using a professional adviser is ideal to complete this process within the confines of the law.