A 1031 exchange allows you to defer capital gains taxes on the sale of a property when you purchase another property similar to the one that was sold. You would not have to pay taxes until the corresponding property is sold. Since you have purchased a like-kind property, you have not made an actual sale. However, not all types of property are subject to the benefits of a 1031 exchange. The property must be held for business or investment purposes. There may be some uncertainty when the property involved is mixed-use, so you should get help from a qualified intermediary to learn about tax strategies that may work for you.
You Can Qualify for Tax Deferments and Breaks When Selling Mixed Use Property
Sometimes, an owner uses part of the property as their primary residence and the other part as their business office. For example, you may own a duplex, where you live in one part of the property and rent the other. A specific category called a mixed-use exchange applies to these types of properties. Section 121 of the Internal Revenue Code states that you may be entitled to an exclusion from capital gains tax obligations for the residence part of the property. A taxpayer may take up to $250,000 in deductions for the residential part of the property, and a married couple can have up to $500,000. Thus, you are able to take some cash out of the sale for yourself without having to pay up to the full amount of possible taxes.
You Must Value the Property with the Help of an Expert
It is up to you to determine the value of the residential portion of the property. The value would depend on the percentage of the property for personal use versus that which produces income. For example, if you live in one unit of a building with many dwelling units you rent, your personal residence deduction may only be for a portion of the property’s value. The same thing goes if you live in a farmhouse on a large farm. Much of the property’s value would be the land’s acreage.
Just because you have the right to take a certain amount of tax deductions does not mean you are entitled to it if the residential portion does not have that value. The IRS may give your own determination of the value of the residential part of the property some deference unless it is unreasonable. Thus, it is helpful to have assistance from a recognized property appraiser to support your determination if it is ever challenged.
After you deduct the residential portion of the property, you could then execute a Section 1031 exchange on the remaining business portion. Ordinarily, you would have to pay taxes on the amount of the gain that is not excluded as a personal residence. If you choose to buy like-kind property, you can further defer your tax obligations. Thus, you can continue to reinvest proceeds and earn even more money with the profits you have already earned from selling property. You could also diversify your portfolio and create multiple streams of income before you have to pay money in capital gains taxes to the federal government.
Contact a Qualified Intermediary at 1031 Federal Exchange
You need a firm handle on tax laws before executing this complex maneuver to save money, and the qualified intermediaries at 1031 Federal Exchange can help. We can explain your potential tax savings options and help you execute strategies to defer your obligations. Call 513-488-1135 or contact us online to schedule a free initial consultation to discuss your options. Our office is in Loveland, Ohio, and we work with clients nationwide.