Avoid Capital Gains Tax When Selling Real Estate

You can cut the capital gains tax out of a real estate sale with the use of Exchange 1031. Exchange 1031 provides that if you are going to use proceeds of the sale of a real estate property to purchase additional property, you can avoid paying the capital gains tax.

The idea is to bolster real estate sales by allowing taxpayers to waive this tax on your property sale if the main purpose of the sale is to purchase another property. This provision gives an incentive for both the buying and selling of property.

Capital gains taxes assessed in the sale of real estate are estimated at around 20%-30%. If a taxpayer is engaged in a "like kind" real estate purchase, the tax reduces his ability to purchase a similar property by effectively cutting the resale value of their property by 20%-30%. This, in turn, will reduce the amount of money that they are likely to spend on a "like kind" purchase of another property.

There, of course, are conditions to deferment of capital gains tax under Exchange 1031.

The value of the property you are purchasing with the proceeds from the sale of your property must be equal to or more than the net profits from the selling of your property.

The full equity realized from the sale of your property must be used to purchase the "replacement" property.

If the replacement property you purchase under an Exchange 1031 provision turns out to be of lesser value than the property you sold, you will be liable to pay an accrued tax. The amount of your tax liability will be determined by the amount the replacement property fell short of the full equity of the sold property.

In other words, the amount of tax liability you incur will depend upon your given situation and the amount of full equity you realized after the sale of your property. Therefore, part of the tax is deferred in this instance, rather than deferring all of the capital gains tax.

The hope of this provision is that such a substantial tax savings will encourage real estate sellers to purchase "replacement" property rather than invest the income from such a sale of real estate into some other venture. It is a good provision for people looking to "buy up" in the housing market.