A 1031 tax exchange is used when a property owner sells its property and then reinvest the proceeds into a similar type of property. This works well when someone that has an investment property or condo sells that condo and uses the profits to pour into a new investment property. This avoids capital gains tax. Capital gains taxes when a property is sold and the owner must pay a tax on the profits from that sale unless they have lived in the home for two years. Most investment properties do not fall under this category to the 1031 tax exchange was created to avoid paying a penalty tax each time an investment property was sold.
We see a lot of this type of investment in Panama City Beach Florida. If you have a property that will net you again upon the sale then you should definitely look into a 1031 exchange. This is for property that is classified as a vacation home, held for an investment, primarily for sale to customers or used in taxpayers trade or business. You should always consider a 1031 tax exchange to defer paying capital gains taxes and as leverage toward a new investment property. By setting up a 1031 tax exchange it can provide investors with the opportunity to differ all capital gains taxes and by exchanging those taxes into a new investment, the investor essentially receives an interest free, no term loan from the government.
But, what if you want to live in the property that you’ve been using as an investment?
This is where a unique situation can occur. If you live in the home for a total of two out of five years, which does not have to be consecutive, then you can avoid paying capital gains taxes as long as those profits do not exceed $250,000 for individuals and $500,000 for married couples. This works great if you have an investment property in Panama City Beach but want to sell it. You might consider living in it for 24 months and avoiding the capital gains profit if you’re not planning on reinvesting.
For more information on 1031 tax exchanges or to speak with a qualified mediator that handles this type of exchanges please contact us anytime.