Basis refers to the cost of an investment property that is used to determine the amount of capital gains tax owed when the property is sold. In a 1031 exchange, the basis of the original property is carried over to the replacement property, allowing the investor to defer paying capital gains taxes on the sale of the original property.
- Basis refers to the cost of an investment property that is used to determine the amount of capital gains tax owed when the property is sold.
- In a 1031 exchange, the basis of the original property is carried over to the replacement property, allowing the investor to defer paying capital gains taxes on the sale of the original property.
John wants to sell his rental property and use the proceeds to purchase a replacement property through a 1031 exchange. The basis of John’s original property is $100,000, which includes the purchase price and any capital improvements made to the property. When John sells the original property and uses the proceeds to purchase the replacement property through a 1031 exchange, the basis of the replacement property is carried over from the original property and becomes $100,000. This allows John to defer paying capital gains taxes on the sale of the original property.
- Keep accurate records of the basis of the original property and any capital improvements made to the property for tax purposes.
- Consider the use of a qualified intermediary (QI) when conducting a 1031 exchange to ensure that the exchange meets IRS requirements and to avoid actual receipt of the sale proceeds.
- Consult with a tax professional to fully understand the implications of the basis in a 1031 exchange and to determine the correct basis of the original property.
- Consider the use of a qualified intermediary (QI) when conducting a 1031 exchange to ensure that the exchange meets IRS requirements and to avoid actual receipt of the sale proceeds.