If you own real estate that has increased in value and you sell it the IRS will tax your profit as a capital gain at the rate of 20%. Also, depending on the state the property is in you may have to pay tax on the gain 3% to 7%.

Example: If the profit from the sale of your real estate was $40,000 the tax you may have to pay on that capital gain could be as much as $10,800!

How can I avoid paying the IRS the $10,800?

Reinvest in new real estate! Section 1031 of the Internal Revenue Code allows you to exchange your old real estate for new real estate and defer the tax on the capital gains by moving your tax basis from the old property to the new property.

What property can be exchanged?

"Like kind" is the term used by the IRS. It refers to property used in a trade, business or held for investment. Almost all real estate other than your personal residence and newly acquired property are considered "like kind." Commercial property can be exchanged for residential. Raw land can be exchanged for apartments.

For more information on the time requirements, identifying a replacement property, the language required for the exchange or the time requirement email us at obxrealtor@earthlink.net.

Always consult your financial consultant, CPA or attorney to determine the tax consequences of your individual situation