What's Not To Like About A Like-Kind Exchange?
But there's a day of tax reckoning when you sell the building. Assuming it has appreciated in value since you acquired it, you'll have a significant capital gain. If you've held the property for a year or less, your gain will taxed at high rates for ordinary income. And even with a long-term gain, you may be taxed at a rate as high as 20%.
Fortunately, though, you can postpone the tax hit on a real estate sale indefinitely by arranging a like-kind exchange of properties instead of selling a building directly. If you meet the requirements under Section 1031 of the tax code, and the accompanying regulations, your gain will be tax-deferred.
Caution: There are special risks associated with real estate investments, including 1031 exchanges. This includes substantial fees and expenses and strict timing limits. If the transaction isn't properly constructed and executed in a timely manner, an investor may lose all tax benefits of such a transaction, including depreciation recapture.
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