Tax Deferral For Investment Property

Robert 'Rusty' Tweed

August 2, 2022

Investment Property

If you consider investing in investment property, you may wonder about tax deferral. Several methods include a 1031 Exchange, a Reverse mortgage, and a Like-kind exchange. While each option has its advantages and disadvantages, these tax-saving strategies are worth exploring. James Moore provides various tax and real estate services, including investment deadline extensions. He can help you find the best plan for your situation.

1031 Exchange

If you are considering using a 1031 Exchange for an investment property, you’ll want to be sure that you know all the necessary details to get the best results. This process requires you to exchange property of like-kind in the United States with another investment property. Unlike traditional real estate transactions, 1031 exchanges will defer several types of tax liabilities. Here are some of the details of how it works.

The 1031 Exchange program has been increasing in popularity recently. As a result, many people who have invested in a piece of investment property are preparing to sell it. Unfortunately, many are faced with a shallow tax basis on their investment property, which can result in substantial federal and state income taxes. This article will highlight some of the essential details you should keep in mind before making a move.

Reverse mortgage

Reverse mortgages are a popular financial tool for older homeowners who want to take advantage of home equity without making monthly payments. A reverse mortgage allows homeowners who are 62 or older to borrow money against their property with no payment obligations until they vacate their residence. The most common reverse mortgage is the home equity conversion mortgage (HECM), which does not require monthly mortgage payments, but requires payment of property taxes and maintenance of the property.

In addition to the tax deferral, a reverse mortgage can be used to access wealth without making a mortgage payment. Interest is deductible, but only when the money is paid off. Importantly, attraction is not deductible unless used to purchase, build, or improve the home. However, mortgage interest on an investment property cannot be deducted if the proceeds are used for living expenses.

Like-kind exchange

If you own an investment property, you may qualify to make a like-kind exchange. When you sell the investment property, you can put off paying taxes by putting the net equity into another property of the same value. You don’t have to buy the new property outright, though. You can qualify for tax deferral in several different ways. Here are three of the most common. Keep reading if you’ve been thinking about doing one of these exchanges!

To qualify for a like-kind exchange, you must trade an investment property for another one. The exchanged properties must not be identical, but they must be comparable. For example, a parking lot for business purposes may qualify as a like-kind exchange. One common mistake in attempting to make a 1031 exchange is missing the deadline to find a replacement property. You have 45 days to find a replacement property. Then, you must close on the new property within 180 days.

Capital gains tax deferral

You can defer your capital gains taxes by selling your investment property on an installment basis. This sale allows you to delay recognizing capital gains until future years. This deferral will enable you to defer paying taxes on the income you’ve earned and reinvest it.  The average cost includes interest income, gain on sale, and the return of the adjusted basis on the property.

If you pool your investments, you may be eligible for a capital gains tax deferral on your investment property. You can contact the CRA to learn if your pooling arrangement qualifies. A qualifying small business corporation must own a portion of the investment property, and shareholders must have held the shares for 185 days. If you dispose of your claims, you must purchase replacement shares within 120 days. The maximum capital gains tax deferral is two years.