For the last decade, so many duplex owners have found themselves owing the bank more than their property was worth that the words and phrases equity, capital gains tax and 1031 or Starker exchange have rarely appeared in this blog.
My how times have changed.
If you’ve never heard these phrases, you’re about to hear them a whole lot more.
The Internal Revenue Service views your duplex as an investment. And, to that end, if you make a profit on it when you sell, they would like you to give them a cut. Oh, by the way, if you depreciated it all during the time you owned it, they would also like you to give them a piece of that.
By the time it’s all said and done, that nice check you thought you’d get at closing goes from fat to thin in a hurry.
So what can you do about it?
Enter a tax deferred exchange, otherwise known as a 1031 or Starker Exchange.
A 1031 exchange allows you to “trade” your equity from the sale of one property for equity in another property.
This DOES NOT mean you need to find a property just like the one you’re selling, or that you and another seller must literally trade properties.
Rather, it means you must follow a very strict set of rules laid out by the IRS. They are:
Perhaps the best news of all in this is you can continue to exchange into bigger and bigger properties throughout your life. If you choose to cash out at any point, you will have to pay taxes and depreciation recapture back to the day you started this chain.
And if you leave the properties to your kids? All they pay is an inheritance tax.
Give me a call today to find out how much equity you would have to reinvest!