People are always looking for ways to save on tax rates, and while the Real Estate sales market doesn’t exactly flex when it comes to this, there are two smart tax-saving options for Real Estate sales that every buyer and seller should be aware of.
Section 1031 Trade
A section 1031 trade carries strong benefits. The most common benefit is the qualification for tax deferment from the sale of a business or investment property by using a “like-kind” exchange. This is when proceeds are reinvested from the sale of one property into the sale of a similar property. All IRS rules must be followed when doing so, including an Exchange Agreement between both property owners.
An exchange can be a simple swap of property, a simultaneous exchange, or a delayed exchange. The trade must be for “like” property, although the definition of “like” does cover much ground and is considered relatively general. However, the taxpayer must identify the replacement property within 45 days of the date of closing on the relinquished property.
Section 1031 trades must be well planned ahead, and a qualified intermediary must be involved to set up the exchange. The intermediary holds the funds after selling the first property, and releases them once you receive the second property. The tax will always be based upon the taxable gain. If the property acquired is worth less than the original property cash may be received, you would then be responsible for paying tax on that part of the exchange.
Installment Sale
An Installment Sale is another smart tool to minimize taxes. This is when the buyer and seller enter an installment agreement in which the buyer agrees to make a down payment and pay the remainder of the sales price over a term of years.
This is an effective way in avoiding bank loans to pay the seller; here the buyer is “borrowing” directly from the seller. The terms are dictated by the buyer and the seller, as is the interest rate. The seller ordinarily takes a purchase-money mortgage from the buyer. This way the buyer’s promise to pay the seller is secured by the property. If the buyer doesn’t pay, the seller can foreclose and get the property back.
Investment Sales can save the seller money if the income from the sale would put them in a higher tax bracket if they were to receive the full sale in one year, therefore, the taxpayer would be able to defer gains by using the installment sale. Installment Sales do have rules and regulations that must be followed; however, Installment Sales are considered commonplace and hold value in their simplicity.
