There are many good ways to invest for your future. Real estate is a common way for people to invest their funds to try to grow their wealth for their retirement and the future of their family. Real estate has many potential pitfalls, not least of which is the capital gains tax. Capital gains is a potentially hefty tax that is assessed against the gains that are realized when you sell a parcel of property for more than you purchased it. Capital gains can potentially take a large chunk out of the profits you stand to make from sale of your investment real estate. Luckily, Section 1031 of the Internal Revenue Code can provide a way to avoid capital gains taxes.
Code Section 1031 allows you to exchange one piece of real property for another and put off paying federal capital gains taxes. The catch is that both properties must be “like kind” properties. This means that both properties have to be either held for use in trade or business or held for investment purposes. For example, if you own a rental home, you can sell it and then reinvest that money and any profit made back into purchasing another investment property. You will not have to pay capital gains taxes on the profit you made from selling the rental home at that time. This means that you can continue to build equity in the new property, sell it, reinvest that profit, continue building equity, and so on. This can help with building your wealth because you are not paying capital gains taxes at the time that you sell each piece of property. It is important to remember that the new property has to be at least equal to or greater than the value of the property you are selling. Also, if you receive cash or other property that is not real estate in exchange, it will be taxable.
Using Code Section 1031 can be a good tool for estate planning. If you still hold your real property that you acquired through your Code Section 1031 exchanges at the time of your death, the capital gains become part of your estate and your estate will not have to pay the capital gains taxes you otherwise would have paid if you sold your property. This means that instead of having to pay capital gains tax every time you otherwise would have sold a property and losing that money to the state, your beneficiaries acquire all of the equity you have spent so much time building.
Call us today at 720-420-1777 to discuss your estate and what we can do to help you build wealth to leave for your beneficiaries.