New York - Natalia Sishodia, the founder of Sishodia PLLC law firm and a 1031 exchange lawyer, recently published an article on her website explaining the benefits of a 1031 exchange. The IRS code section that applies to this type of transaction is Section 1031, which allows for tax-free exchanges between two properties as long as certain guidelines are met.
In her article, Ms. Sishodia comments on how 1031 exchanges permit real estate investors to purchase and sell a property without having to pay capital gains taxes and discusses the purpose of the exchange.
Specifically, the 1031 exchange lawyer explains: ”A 1031 exchange allows a real estate investor to buy and sell a property without being subject to capital gains taxes. These taxes are deferred until the final sale of an exchanged property. Right now, capital gains taxes are high (22 to 30 percent) and can substantially eat into any profit realized in the sale of an investment property. These taxes may trend even higher in the future.”.
She then further discusses why real estate investors may want to take advantage of the 1031 exchange. First, the deferment of capital gains taxes is allowed until the final sale of an exchanged property. It also affords more available capital to reinvest elsewhere and depreciation recapture gain is postponed. Additionally, it provides flexibility in the division or consolidation of properties.
Since a percentage of the property's cost is depreciated each year for investment properties, capital gains are calculated based on the property’s net-adjusted price. According to Ms. Sishodia, If a property is sold for more than its depreciated worth, the depreciation recapture will be taxed as ordinary income.
Special rules also apply to the exchange of depreciable properties. A 1031 exchange can avoid a depreciation capture if a depreciable property is exchanged. Furthermore, Ms. Sishodia elaborated on the common mistakes to avoid in setting up a 1031 exchange.
“The IRS has very specific rules concerning 1031 exchanges. Any errors can result in you having to pay capital gains taxes on the relinquished property. When setting up a 1031 exchange, there are some common mistakes that investors make that must be avoided.” said Ms. Sishoida.
These mistakes include not fully understanding the requirements for a 1031 exchange, Exchanging a property not held for a business or investment, and closing the sale of the relinquished property without first setting up the 1031 exchange to name a few.
Moreover, Ms. Sishodia recommends that an investor wanting to use a 1031 exchange should review all matters with their legal and tax advisors to ensure that qualifications are met, and their objectives will be served through the exchange. When done correctly, there are no limits to the number of times that a 1031 exchange may be used.
To learn more about 1031 exchanges, visit Sishodia PLLC’s website.
About Sishodia PLLC
At Sishodia PLLC, we are an industry-recognized boutique law firm focusing on New York real estate law and dispute resolution. With extensive knowledge and experience in both residential and commercial real estate sectors, we offer a fine-tuned individualized approach to each client’s needs. Our goal is to alleviate any stress involved in purchase or sale transactions of real estate in New York, offering our clients peace of mind knowing that their interests are being represented each step of the way.
SOURCE: Press Advantage [Link]
Sishodia PLLC is a boutique New York real estate law firm offering experienced, individualized legal solutions to clients ranging from first-time homebuyers to seasoned real estate investors.