When you sell your investment property you will have a taxable transaction the year of the sale. Section 1031 of the U.S. Internal Revenue Code allows for the gain on your sale to be deferred, which means you may be able to avoid paying capital gains taxes the year you make the sale. When you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value, you qualify for deferral of paying taxes on the gain.
1031 Exchanges can get complex, be sure to give us a call if you are considering a 1031 exchange.
When you lose property through theft, casualty, or condemnation (government buying your property/eminent domain), you may have to realize the gain from insurance proceeds/condemnation proceeds, if the proceeds exceed your basis in the property. This is an unfortunate situation in cases of theft or casualty where insurance proceeds are given for property when the proceeds exceed the value of the property, and in situations of condemnation of property/ eminent domain. Think of having your business being destructed/condemned by the government, you get a one time payout from the insurance company or the government, but your property is no longer a cash flowing asset.
Section 1033 of the U.S. Internal Revenue Code allows for a deferral of paying taxes on the gain. The deferral of the gain is similar to a 1031 exchange, the gain that is realized can be deferred if replacement property is purchased.
1033 Exchanges, or “involuntary conversions” have very specific rules and requires a detailed analysis of each specific situation.