The Income Tax Benefits For Real Estate Investors

There is a wide range of noteworthy income tax benefits that are apparently looked over by the real estate investors that could help them to defer or eliminate some or all of their income tax liabilities while selling or disposing of their real estate property.

It is beneficial for a real estate investor to have good information about the basics in order to choose which strategy to use when, Here is a concise summary of 1031 and 1033 exchange that an investor should discuss with his or her tax advisor before buying or selling a property.

Section 1031- Like-kind exchange of property held for rental, investment or used in a business. 

1031 exchange
1031 exchange property

You must be thinking about what could be a 1031 exchange. It is one of the best strategies that an investor can use to gain value later. Section 1031 of the Internal Revenue Code provides that real estate property that is held for rental, investment or for use in a business can be easily exchanged with like-kind real property that is also held for rental, investment or use in a business that allows the investor to defer his or her Federal or the state income tax liabilities. It is essential to remember that 1031 exchange transactions are tax-deferred exchanges, not tax-free exchanges. Both the exchanges are different from each other and your advisor will frequently refer to them as well.  The investor’s capital gain and the decreased recapture tax liabilities are simply deferred. It can be continuously and for an indefinite period be deferred into a like-kind replacement property purchased as part of a series of 1031 exchange transaction.

The tax deferral advantages of this like-kind exchange allow the investors to easily sell, dispose or convert their real estate without reducing their cash position by paying the capital they have gained or the depreciation recapture taxes. This offers the investor with the continued liquidity required to enhance his or her real estate portfolio by trading up in value and eventually enhancing his or her net worth by increasing the cash flow and the appreciation of the capital from the portfolio. When completing a 1031 exchange transaction, an investor requires a qualified intermediary. Section 1031 of the Internal Revenue Code is applicable to personal property as well as real property.

Section 1033- involuntary conversion of property through Eminent Domain or Natural Disaster.

Section 1033 of the Internal Revenue Code or 1033 Exchange is all about real property that is or will be the subject of an obligatory or involuntary conversion by an eminent domain proceeding, for example a condemnation by the local, state or the Federal government or for any destruction by a baby or an act of God such as an earthquake, hurricane, fire, or other natural disaster in whole or in part that can be exchanged on a tax-deferred basis for ‘like-kind’ real property that was involuntarily converted.

The owner of such kind of properties has about two years to replace the destroyed property due to acts of God and three years to replace property converted due to eminent domain proceedings. A qualified intermediary is not necessary when there is a 1033 exchange transaction. A 1031 exchange of multiple properties or assets is done if there is one or more abandoned properties being sold and shifted and one or more like-kind replacement properties being recognized and attained.

Consult with the tax or legal advisors

The real estate investors should always consult with the advisors before proceeding with any of the strategies. You can talk to them and understand the concept first before applying for any benefit. So, talk to your  1031 exchange advisor today!

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