Protecting your assets against capital gains taxes

Capital gains taxes can sap the profitability of your investment in a property when it comes to selling it. In the beginning of 2016, long-term capital gains were set to be taxed by as much as 15 to 20 percent. 

What does that mean for you? If you have a property with an initial equity of $100,000 and sell it for $500,000, capital gains taxes at 20 percent would reduce your return by as much as the original equity amount, leaving you with $400,000.

The Internal Revenue Service offers a remedy for investors in Section 1031 of the federal tax code, also known as a 1031 Property Exchange. Rather than pay taxes amounting to the original equity, this method would allow you to reinvest your profits into another property.

Section 1031 sets requirements for your investment to qualify for deferment. Those include:

  • Like-Kind Property. The old and new properties must be utilized for a business, trade or held for investment. This includes vacant land. Property held for resale, such as homes to be flipped, cannot utilize 1031.
  • Identification of property within 45 days. The new property you intend to invest in, or purchase, must be identified within 45 days of closing the sale of your old property. You are allowed to identify up to three properties.
  • 180-day purchase period. You must close on the purchase of a new property within 180 days of closing on the old property. The closing transaction is limited to one or all three properties identified in the first 45 days.
  • Qualified Intermediary. Sellers may not have access to the proceeds from the sale of the old property, requiring an independent third party to handle it. The intermediary will coordinate with the seller and buyer’s attorneys, preparing any documents required by the IRS.
  • Mirror image title. Your name must be listed on the new title as it was on the old property’s title. This applies whether you are an individual or a corporation named on the previous property title.
  • Equal or greater amount of reinvestment. The new property must be of equal or greater value to the property you sold to take advantage of a full tax deferment. All cash profits must be reinvested as well.

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Eliminating capital gains taxes in Nevada

Utilizing Section 1031 of the tax code could add up to you owing nothing in the long run. For example, you, as a seller, my move into your investment property and declare it your primary residence. After residing in the property for more than two years, you would be eligible for an exemption of $500,000 in taxes if you sell the residence.

A property owner’s death presents another avenue for eliminating taxes. If you gained on your property before your death and bequeath it to an heir, that heir would receive a step-up basis on the property. In simple terms, your heir would be able to sell the property at fair market value without paying any capital gains taxes.

Navigate the tax deferment process with knowledgeable legal counsel

Applying a 1031 exchange requires an understanding of the related nuances of tax codes. Between the documents and procedures designed to ensure a fair, legal exchange of property without paying capital gains taxes, it is imperative you obtain legal counsel experienced with 1031 property exchanges.

Attorney Phillip Stone, of The Stone Law Firm in Reno, NV, has advised businesses and individuals in matters of real estate asset protection for more than 30 years. Whether you’re a private investor or a real estate developer, every property investment has unique variables that could qualify or disqualify your use of Section 1031. Phillip commits himself to learning your specific real estate investment goals. 

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1031 property exchange attorney in Reno, NV

If you’re considering 1031 property exchange as a way to extract the most out of an investment sale, allow an attorney with a depth of asset protection knowledge guide you through the process. Set up a consultation with The Stone Law Firm in Reno to discuss your options with attorney Phillip Stone.