Susan Ormont - RISK VERSUS REWARD: A SIMPLE GUIDE FOR INVESTING IN REAL ESTATE

sale to buy another property. This makes your income essentially tax-free, and you can put all your profits toward the next property, which is called trading up. A 1031 exchange covers only business or investment properties. In general, vacation or second homes don’t qualify, but you should check with a tax expert to see if there are any exceptions, especially when it comes to the usage test. There are three specific requirements to qualify for a 1031 exchange, and you must meet all of them: • The like-kind exchange. The property you buy must be similar to the one you sold. The purchase price of the new property must be the same as, or more than, the one you sold.There’s no switching from commercial to residential or vice versa; however, you can often exchange property and land. • Time restrictions. You must officially record identifying a new property within 45 days of selling your old one. There are different ways to identify replacement properties: 1. Find three properties, not worrying about their fair market value. 2. Identify as many properties as you can, as long as their aggregate fair market value is less than 200% that of the sold property on the date of the transfer. 3. If the above two rules are exceeded, you can buy 95% of the aggregate fair market value of the identified properties. Another benefit is the 1031 exchange, which allows you to put off paying capital gains taxes if you use your profit from a real estate

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