When you sell your house in the Maryland location, Virginia location, Washington DC location, or Baltimore location, any profits you make are subject to capital gains or recapture taxes. To avoid paying those taxes, you can reinvest the profits in a new property under 1031 exchange. To do this correctly, you’ll have to have a properly structured exchange.
There is a timeline for completing this exchange and you have just 45 days to find a property of similar or greater value than the one sold. You only have 180 days total to complete the purchase of the new property. This timeline is a bit tight if you want to take your time to shop around.
Another restriction on the 1031 exchange is the type of property purchased. You can’t sell your business property and buy a house, or vice versa. The property that is sold must be of like-kind to the property purchased. They don’t have to be exact though. You could sell a business and buy a business, or sell land and buy an apartment complex.
Debt and Equity
The 1031 exchange needs to be 100% in order to defer the taxes. This means that the equity or profit from selling the property needs to be reinvested 100%. If you make $50,000 on the sale of your house, you need to put that full amount back into the new property. If you owed $200,000 on the property, you need to replace that same amount of debt as well. You are exchanging the equity and the debt of one property for another.
Hire a Professional
Unless tax law and real estate are areas you considered yourself to be an expert in, you may want to consult a professional when looking at a 1031 exchange. There are risks involved and if not done properly, you’ll still have to pay the taxes you’re trying to defer. This is a great option for many people selling and buying a home, but to find out if it’s right for you, take the time to really learn the ins and outs of 1031 exchanges.