What are Capital Gains?
Capital gains, in the context of real estate, refer to the increase in the value (appreciation) of a property over time. When the property is sold, the difference between the purchase price and the sale price represents the capital gain.
Reinvesting those capital gains back into real estate is known as a 1031 exchange, named after Section 1031 of the U.S. Internal Revenue Code. This provision allows an investor to defer paying capital gains taxes on an investment property when it is sold, as long as another “like-kind property” is purchased with the profit gained by the sale of the first property.
(Ex. Purchase Price $250,000; Sell Price $600,000 = Capital Gain: $350,000)
How Does That Work?
- Sell the Property: The investor sells the existing property that has appreciated in value.
- Identify a Like-Kind Property: Within 45 days of the sale, the investor must identify a potential replacement property.
- Purchase the Like-Kind Property: Within 180 days of the sale, the investor closes on a new property.
- Defer the Capital Gains Tax: The investor can defer the capital gains tax that would typically be incurred from the sale of the first property.
By using a 1031 exchange, investors can reinvest the profits from a sale into new properties, allowing them to potentially acquire larger or more profitable properties, thereby growing their real estate portfolio.
Questions? Looking to get pre-qualified for your investment property purchase or want to get the process started on a piece of property that you have already found? Call (866) 803-2853 or apply online today.