Terravita Scottsdale is a great place to buy a home for an investment. Obviously, when buying a home, there are many tax benefits, with the most important being the exclusion of up to $500,000 profit made on the sale of a home, such as ones in Terravita.
But if you’re a real estate investor, you still have to pay capital gains tax when you decide to sell. Another thing real estate investors do oftentimes is they have to “recapture” the depreciation since most depreciated their properties over the years.
Now, there is a way of deferring payment of this tax, known as a Like-Kind Exchange by the Internal Revenue Code.
Remember, the exchange process is not a “tax free” device even though that’s what people refer to it as. Other terms include a “Starker exchange” or a “deferred exchange.” Whatever you call it, it will not relieve you from having to pay the capital gains tax whether it’s a home in Terravita Scottsdale or another neighborhood. However, it does let you defer paying that tax until your last investment property is sold.
Section 1031 allows a delay of gain based on certain conditions. Once these conditions are met, then you need to determine the tax consequences. A like-kind exchange will have your profit being deferred “until you sell the replacement property.” Basically, you need to chat with your accountant to find out if the savings from the like-kind exchange will make up for the lower cost basis on your new property. You’ll also want to know how much tax you’ll have to pay if you do not do an exchange.
One problem, whether in Terravita Scottsdale or elsewhere, is that the traditional, classic exchange rarely works since not everyone is able to “find a replacement property before they sell their own property.”
Under a successful 1031 exchange, no amount of the sales profits can be available to the seller. Usually, proceeds are placed in escrow with a neutral party. The amount of interest you earn can be huge since you can’t use these proceeds for 180 days for buying a replacement property.
“The IRS permits the taxpayer to earn interest -- referred to as "growth factor" -- on these escrowed funds.” This interest much be reported as earned income. Once a replacement property is found at Terravita or in any neighborhood, the interest can be used to buy the property or paid to the exchanger.