As a rental property owner, you understand how important that investment is. For many people, managing that investment sometimes means selling an existing rental property, whether it's to find a better investment or in the effort to save money. If you do sell your rental property, you may find that you have to pay capital gains tax on the proceeds. However, a 1031 tax exchange can help you to save that potentially costly tax expense. Here's a look at what you need to know to take advantage of a 1031 tax exchange when you sell your rental property.
The Proceeds Must Stay With An Intermediary
If you plan to take advantage of a 1031 tax exchange, you need to appoint an official intermediary before the sale. That intermediary will receive the funds from the property sale and hold them for up to six weeks. That gives you six weeks to find another property that you can invest the money in.
You Must Use All Of The Proceeds In The Subsequent Purchase
If you plan to claim a 1031 tax exchange, you'll have to make sure that you choose a property of equal or greater cost than the revenue you earned from the original sale. This is important because the funds will only be protected from capital gains tax if all of the money is invested in another property.
You Can Claim The Tax Exchange In Reverse As Well
If you purchase a new property before you close the sale on the original one, that doesn't mean you're not eligible for a 1031 tax exchange. In fact, you can still file the paperwork and claim the tax relief even if you complete the sale after purchasing the new property.
It Doesn't Have To Be One-For-One
Another thing that you should keep in mind is that you're not restricted to selling one property and buying one property in return. In fact, you can sell one property and then invest all of the proceeds in multiple properties. Alternatively, you can sell multiple properties and invest all of those proceeds into one single property. As long as all of the money from the property sale is spent on new properties, it doesn't matter how many you're buying.
These are a few of the things that you should know about 1031 tax exchanges for your rental property. If you're planning to sell a rental property, you should consider this option for saving on the capital gains tax. Contact a local tax professional to learn more about rental property 1031 tax exchanges.