Don't Succumb to Paying Capital Gains Taxes!

With the economy and especially the real estate market the way they are today, this is the time to invest - if you have the knowledge and means to do so. People are buying investment properties left and right at affordable prices. However, when it comes to business, especially real estate, nothing is guaranteed, nor is it as simple as it looks.

Before you get involved in buying and selling real estate, you want to know some of the tactics that can save you money and time. Many real estate investors like to use Section 1031 of the IRS Code, which was created in 1986 for real estate investors to be able to defer taxes from the sale of an investment property by exchanging into a new one. Here are some of the stipulations you should know before doing a 1031 exchange.

• Find a QI with a high IQ: When you sell a house and want to do a 1031 exchange, you do not hold the money from your sale. The money is held by a Qualified Intermediary (QI), someone who has knowledge in accounting and real estate law. For a fee, the QI holds your money until you buy your next property, so make sure your QI is knowledgeable and trustworthy. In fact, you never take possession of your funds; the Qualified Intermediary holds them and then gives them to the person or company from which you are buying the house.

• Shot Clock: You do not have much time to purchase your next investment property. Once you have sold your property, you have to identify at least one and up to three replacement properties within 45 days. You are also limited to 180 days to buy the replacement property after the original sale. However, keep an eye on the calendar if you sell your property at the end of the year because instead of a full 180 days to close on a new property that you have at other times of the year, at the end of the year you will only have until taxes are due on April 15^th. If you cannot close on the replacement property by April 15^th, you will have to file an extension with the IRS on your taxes. Another fact people are not aware of is that you must purchase a property that is of equal or greater value to the one you sold.

• Consider Fractional Ownership: You sold your property and made a substantial profit. You want to defer paying capital gains taxes on the proceeds, but you don't want to mess with the hassles of property management. Consider doing a Tenant in Common (TIC) deal, in which multiple investors enjoy fractional ownership of a property. There are many advantages to Tenant in Common deals; for example, you can hire someone to manage your property, thereby relieving you of the day-to-day nuisances that accompany owning investment property. Before you fall in love with Tenants in Common Properties, know that you have less control over your property. When you are the sole owner of a property, you make all the decisions regarding maintenance and upgrades, which is not the case with Tenant in Common Properties.

Investing in real estate is something that should be done with caution and patience; you do not want to rush into any decisions. And before making any moves, make sure to consult a professional. Find a knowledgeable mortgage broker, accountant, and/or real estate lawyer who you trust to give you the best advice for your individual situation.